The sheer number of life insurance policies available to you may be overwhelming if you’re a first-time buyer. While some policies provide only a death benefit while others offer investment options, many life insurance policies also offer investment options. An indexed universal insurance policy is a good choice if you’re looking for life insurance that earns money with moderate risk and offers flexible benefits as well as premium features.
Indexed universal life insurance defined
Permanent life insurance can be purchased with indexed universal insurance (IUL). Permanent life insurance policies have two components. A death benefit is one and a savings account the other. The insurer invests a percentage of your premium payments to build your policy’s cash-value account. Traditional universal life insurance policies gain interest based on the money market rate. The savings component of IUL insurance are linked to an index, such as the Nasdaq Composite and S&P 500.
Permanent life insurance policies typically provide lifetime protection provided you continue to pay your premiums. You can borrow against your policy once it has built up a cash value. You must repay the loans with interest or your policy’s death benefit will be reduced. Flexible coverage is available through IUL policies. You can adjust your premiums or adjust your policy’s final benefit. However, this must be done after your savings vehicle has enough money to cover the policy costs.
How an index universal life insurance policy works
There are many IUL products on the insurance market. Some provide lifetime protection while others offer guaranteed protection until a specific age, usually 85 or 90. Some IULs offer coverage until the maturity date. This is usually when an insured turns 95 or 100. If the policy has a cash value then the insured receives the cash value and the coverage is suspended.
The provider can make all investment decisions with an IUL policy. The provider can invest in bonds and up to four or five market indices. This could include the Fidelity AIM Dividend Indexed, Nasdaq composite account or one or more S&P 500 accounts. IUL insurance policies often include an interest-rate guarantee to protect your cash value account from market fluctuations.
IUL insurance policies have tax-deferred benefits and you can borrow against your earnings after the policy has built a cash value. You can borrow your own money and use it for anything you want, such as a down payment, paying college tuition, or taking a vacation. The insurer may require that you repay the loan with interest. You could also be subject to tax liability.
IUL policies typically allow you to modify the death benefit. If you wish to increase the face amount, however, your carrier might require that you undergo a medical exam. You may be able to adjust your premium once your policy has reached a cash value. If you lower your premiums or stop paying them, your cash value could be exhausted and your policy may become invalid.
The pros and cons of IUL policies
| Pros | Cons |
|---|---|
| Cash value account | Higher than other types life insurance |
| Flexible death benefit | Equity caps |
| Flexible premiums | Based on the equity index |
| Moderate risk | |
| Unlimitted contributions |
Pros
Cash value account
Cash value accounts invest a portion of every premium payment. Permanent life insurance covers you until your golden years. Your investment can grow to a substantial nest egg that will allow you to access funds in case of an emergency.
Flexible death benefit
You have more flexibility by being able to adjust your policy’s death benefits. Young parents often need more coverage than what they will require when they retire.
Flexible premiums
After accumulating cash value, IUL policies allow you to modify your premium. During difficult economic times, it can be useful to alter the amount that you pay.
Moderate risk
IUL policies offer downside protection but don’t permit you to make investment decisions. You can choose to lower your premiums or stop paying them. This will affect your policy’s cash value as well as your death benefit. Overall, IUL insurance is a low-risk investment.
Unlimitted contributions
The federal tax caps and the premiums that you are able to afford limit your contributions to IULs. IULs let you adjust your premiums so you can pay more to increase your cash value.
Cons
Life insurance is more expensive than other types
IULs, like all permanent life insurance policies are costly because they offer a death benefit as well as a savings option. Insurers must set rates according to the investment and cost of insurance.
Equity caps
Insurance carriers can limit IUL earnings based on market fluctuations. Insurance carriers can adjust the cap rate for each index or adjust rates monthly based upon market performance.
Based on the equity index
IUL insurance earns money only based on market indexes. Permanent life insurance offers more investment options and the potential to increase your policy’s cash value quicker.
Who is an index universal life insurance good for?
A good choice for those who are looking for coverage that covers savings and doesn’t involve a lot in terms of risk, an IUL insurance policy will work. This policy is a great choice for those who are able to afford permanent life insurance and have the need for flexible premium and death benefit options.
Alternatives to universal life insurance indexed
IUL insurance may not be right for you. There are many life insurance policies available on the insurance market. These policies can be tailored to meet your investment goals and budget.
Term life insurance
Term life insurance covers an insured for a specific period of time, usually 1 to 30. Term life policies do not have a cash value and offer a death benefit. Term life policies can be renewed, which allows policyholders to continue their coverage for a longer term. This is usually due to the fact that they are generally older. Term life policies don’t return premiums after coverage ends. They only provide coverage up to an age of 80. Term life insurance is typically the most affordable coverage, especially for those who are young and healthy.
Whole-life insurance
This type of permanent insurance has fixed premiums and a flat death benefit that the policyholder can’t change. Whole life policies, like IUL coverage, build a cash value that you can borrow against. Whole life policies are not like term policies. You can still be protected even after you turn 100.
Variable life insurance
Variable life insurance is a type permanent life insurance that includes a death benefit as well as a savings account. Variable life policies give the insured the ability to pick the type of investment they want, such as stocks, money market mutual funds, or bonds. Variable life policies are more flexible than IULs but can be more risky. Investments that don’t perform well can cause the policy’s cash value to decrease and the death benefit to drop.
Universal life insurance
Universal life insurance works in the same manner as IULs but it creates a cash value using a money market interest rate instead of a market-index. Permanent life insurance allows policyholders to adjust premiums and death benefits.
Variable universal life insurance
Variable universal insurance is a type of permanent life insurance that combines the best of both universal and variable life policies. This policy allows you to make investments as you wish and to adjust your premiums.
Questions frequently asked
Which is the best life-insurance company?
There are many options for life insurance. Some people only need temporary coverage like term life insurance, while others require protection that provides investment options and protection. The top insurance companies provide a great combination of coverage, financial strength, and price.