IUL (Index Universal Life)
Indexed universal life insurance is a type of permanent coverage, which means it can last your entire life and build cash value. Unlike other types of universal life, an IUL policy places the cash value in sub-accounts that mirror a stock index, such as the S&P 500. As an alternative to indexed accounts, IUL policies also offer fixed account options that earn interest at a set rate.
Similar to other universal life policies, IUL gives policyholders the flexibility to adjust their premiums and death benefit as needed.
Indexed universal life is complex with shifting components. Anyone considering an IUL policy should find a life insurance agent to help navigate the buying and management processes.
Who Index universal Life Insurance Works?
Indexed universal life insurance works similarly to universal life. You pay a premium in exchange for lifelong coverage and have the opportunity to build cash value over time. Part of your premium payment goes toward the cost of insurance — i.e., paying out the death benefit — and other fees. The rest is added to your cash value.
Adjustable premiums and death benefit
As with universal life, IUL premiums are adjustable. If you ever decide to skip a premium payment or underpay, the cost of insurance and policy expenses are deducted from your cash value. You may also be able to adjust the death benefit amount if your needs change. However, you may be asked to complete a life insurance medical exam if you apply to increase your coverage.
Pros of Index Universal Life
Control. You can increase or decrease your premium payments, depending on your need for coverage, the growth of your cash account and your financial situation. You can also increase or decrease your coverage amount. However, you may need to complete a medical exam to boost the death benefit.
Stock market-driven returns. With indexed accounts, the cash value grows when the market grows, and that growth is often accumulated tax-deferred.
Cons of Index Universal Life
Risk. The indexes may not rise as quickly as projected. If this happens, the return on your investment could fail to meet your expectations. That could lead to owing extra money to keep your policy from lapsing. If all you want is a guaranteed payout and some cash value, a whole life insurance policy may be a better option.
Effort. You’ll need to monitor your policy closely. During periods of low returns, you may need to pay more into your account to prevent your policy from lapsing.
Capped returns. Caps and participation rates limit you from fully participating in the success of the market. Plus, they can come down over time, further limiting your returns.
Fees. IUL coverage fees can increase over time and may eat into the payments you make or the
What are IUL policy Illustrations?
When you sit down to discuss IUL policy options with an agent, you’ll be shown illustrations. These are projections of the policy’s cash value growth, based on predicted interest rates, fees, payments, caps, participation rates and loans. It’s easy to see these as accurate forecasts of the future, but they are not — they’re estimates. After all, no one knows for certain how the stock and bond markets are going to perform or what adjustments the insurance company will make.
When considering an indexed universal life policy, make sure to ask how the interest rates, fees, caps, participation rates or premiums could affect your policy’s performance.
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