Selling Indexed Universal Life Insurance: What You Need To Know

Indexed universal life insurance is a type of permanent coverage that can last your entire life and build cash value. It offers flexible premium payments and death benefit coverage, and the potential for cash value to grow over time. Indexed universal life insurance policies typically pay interest based on the movement of underlying stock and bond indexes.

Indexed universal life insurance is a good option for those looking for permanent coverage with flexibility and the potential for greater growth than fixed-rate universal life insurance. However, it is a complex product that requires careful consideration and ongoing management.

What is indexed universal life insurance?

Indexed universal life insurance is a type of permanent life insurance that provides a cash value component along with a death benefit. The cash value in an indexed universal life insurance policy can earn interest by tracking a stock market index, such as the S&P 500 or the Nasdaq-100, selected by the insurer. This is different from other types of universal life insurance policies, which only grow cash value through non-equity earned rates.

Indexed universal life insurance policies are more volatile than fixed universal life policies but are less risky than variable universal life insurance policies because they do not invest directly in equity positions. The interest rate derived from the equity index account can fluctuate, but the policy offers an interest rate guarantee, which limits losses. It may also cap gains.

Indexed universal life insurance policies allow the policyholder to decide how much cash value to assign to an equity-indexed account and a fixed-rate account, if available. The policyholder can also adjust their premium as the cash value grows, with the potential to eventually achieve a zero-cost policy where all premiums are paid for by the built-up cash value.

The main features of indexed universal life insurance policies include:

• Permanent, lifelong coverage when premiums are kept up to date.
• Flexible premiums and a flexible death benefit.
• Cash value, along with the potential growth of that value through an equity index account.
• An option to allocate part of the cash value to a fixed-interest option.
• Minimum interest rate guarantees, but there may also be a cap on gains.
• Accumulated cash value can be used to lower or cover premiums without reducing the death benefit.

Some indexed universal life insurance policies may also allow the policyholder to select multiple indexes and decide the percentage allocated to fixed and indexed accounts.

How does it work?

Indexed universal life insurance is a type of permanent life insurance that provides a death benefit and a cash value component. The cash value in an indexed universal life insurance policy can be invested in an equity-indexed account, which is based on the performance of a broad securities index such as the S&P 500 or NASDAQ, and/or a fixed-rate account.

When you take out an indexed universal life insurance policy, you can choose to allocate your cash value to either an equity-indexed account or a fixed-rate account, or a combination of both. The insurance company will provide you with several options to select at least one index to use for the equity-indexed account. The index's performance will determine the interest credited to your cash value.

The interest rate on an indexed universal life insurance policy is variable, but there is usually a minimum interest rate that your cash value will always earn, regardless of market performance. This minimum interest rate acts as a "floor", protecting you from market-based losses. There may also be a maximum interest rate, or a "cap", that limits the growth of your cash value.

The cash value in an indexed universal life insurance policy can grow based on the performance of the chosen index. For example, if your selected index gains 6% from the beginning of the month to the end of the month, the interest credited to your cash value will be 6% multiplied by the cash value. It's important to note that if the index decreases, no interest will be credited to the cash value for that period.

The interest credited to your cash value is typically calculated on a monthly or annual basis. The specific details of how the interest is calculated may vary depending on the insurance company and the policy.

Indexed universal life insurance policies offer flexible premiums, which means you can increase or decrease your premium payments within certain limits. The death benefit may also be flexible, allowing you to adjust the face amount and riders over time.

The accumulated cash value in an indexed universal life insurance policy can be used to lower or potentially cover your premium payments without reducing the death benefit. This means that you may be able to achieve a "zero-cost" policy where your premiums are fully paid for by your built-up cash value.

It's important to note that indexed universal life insurance policies are more complex and tend to have higher premium costs and potential fees compared to other types of life insurance. Before purchasing an indexed universal life insurance policy, it is recommended to speak with a financial advisor to fully understand the nuances and potential of the policy.

What are the pros and cons?

Pros of Indexed Universal Life Insurance

• It offers permanent coverage as long as premiums are paid.
• It provides greater upside potential, flexibility, and tax-free gains.
• It allows you to build cash value as you get older through a stock market index account.
• It has a higher return potential compared to other types of life insurance.
• It has tax advantages on capital gains.
• It does not reduce Social Security benefits.
• It can be designed around your risk appetite.
• It offers the benefit of market gains while building cash value.
• It guarantees beneficiaries a payout upon death.
• It offers the flexibility to adjust premiums and life insurance death benefits as needed.
• It provides permanent death benefit protection coupled with a cash value component that grows tax-advantaged.

Cons of Indexed Universal Life Insurance

• It may be canceled if you stop paying premiums.
• It has higher fees than other policies.
• It has no guaranteed returns.
• Returns are capped at a certain level.
• It is complex.
• It requires careful monitoring.
• It has unpredictable returns.
• It has high fees and costs that can eat into profits.
• It has surrender charges that may reduce the policy's cash value in the early years.

How does it compare to whole life insurance?

Indexed universal life insurance and whole life insurance are both permanent life insurance policies that include a cash value component. However, they differ in several ways.

Whole life insurance policies are generally considered safer and simpler. They offer fixed premiums that do not change over time, a guaranteed death benefit, and a guaranteed but low cash value growth rate. The cash value in whole life insurance policies grows based on a fixed interest rate. This makes it a more predictable option, as you know exactly how much your cash value will increase each year. Whole life insurance is a good option for those who want life insurance protection first and foremost and don't want to spend time planning their premiums and investments.

On the other hand, indexed universal life insurance policies are more flexible and offer the potential for higher returns. With IUL policies, you can adjust your premium payments up or down within certain limits. The cash value in IUL policies is tied to the performance of a stock market index, such as the S&P 500 or NASDAQ. This means that the growth of your cash value will depend on the performance of the index, which can lead to higher returns but also carries more risk. IUL policies also tend to be more complex and may come with additional fees due to their structure.

IUL policies are a good option for those who want the flexibility to adjust their premiums and are comfortable with the risk associated with market performance. Whole life insurance policies, on the other hand, are better suited for those who prioritize stability and predictability and are less interested in investing.

Overall, the main difference between the two types of policies lies in how the cash value operates and the level of flexibility offered. IUL policies provide more flexibility in terms of premium payments and the potential for higher returns, while whole life insurance offers the stability of fixed premiums and guaranteed growth rates.

Which companies offer it?

Several companies offer indexed universal life insurance, also known as IUL insurance. IUL insurance is a type of permanent life insurance that provides a cash value component and a death benefit. The cash value in a policyholder's account can earn interest by tracking a stock market index, such as the Nasdaq-100 or the Standard & Poor's 500.

• Progressive
• Allstate
• IntelliOne Financial Partners
• MassMutual
• Guardian
• Everly Life Insurance
• Western & Southern Financial Group

Frequently asked questions