Universal Life Insurance: Indexing For A Secure Future

Indexed universal life insurance is a type of permanent coverage that can last your entire life and build cash value. It offers long-term death benefit coverage that credits interest based on the performance of a market index. This type of insurance provides flexible coverage, with the potential for cash value growth. The cash value in IUL policies can earn interest in two ways: through a fixed interest rate, or through the performance of stock and bond indexes. IUL policies are highly complex and come with more ups and downs than many other types of life insurance.

How indexed universal life insurance works

Indexed universal life insurance is a type of permanent life insurance that lasts your entire life and builds cash value. It works similarly to universal life insurance, but with some key differences.

Like universal life insurance, IUL insurance includes a death benefit and a cash value account. However, the cash value in an IUL policy grows based on the performance of an underlying stock market index, rather than through fixed interest rates. This means that the cash value of an IUL policy is tied to the performance of an index like the S&P 500 or the Nasdaq composite, and will rise or fall depending on the index's performance.

Policyholders can choose to put their cash value in a fixed account, an indexed account, or a combination of both. Fixed accounts grow at a fixed rate set by the insurer, while indexed accounts mirror the performance of a stock index. The insurer then pays interest to policyholders based on the performance of the index, with interest rates typically reevaluated at the start of each month.

IUL policies also offer adjustable premiums and death benefits. If you decide to skip a premium payment or underpay, the cost of insurance and policy expenses will be deducted from your cash value. You may also be able to adjust your death benefit amount, but this may require a life insurance medical exam.

The cash value in IUL policies can earn interest in two ways: through a fixed interest rate, or through the performance of stock and bond indexes. The interest earned on the cash value is subject to "floors" and "caps" to minimise large swings in interest payments. The floor is the lowest interest rate that will be credited to your cash value, and is usually guaranteed for the life of the policy. The cap is the highest interest rate the account can earn, so if the market is up more than the cap, you will only be credited the cap amount.

IUL insurance policies are complex and come with more risks and fees than other types of life insurance. They are typically more expensive than universal life insurance but less expensive than whole life insurance. IUL insurance may be a good option for those looking for permanent life insurance with a cash component that earns interest, but it is important to carefully consider the pros and cons before purchasing a policy.

Pros and cons of indexed universal life insurance

Pros of Indexed Universal Life Insurance

Indexed universal life insurance (IUL) offers several advantages over other types of life insurance.

• Flexibility: IUL provides flexibility in adjusting death benefits and premiums to tailor the policy to the policyholder's financial needs. This adaptability allows policyholders to increase or decrease the amount paid to beneficiaries upon their death or adjust premiums to fit their current financial situation.
• Steady Cash Value Growth: IUL offers the potential for consistent cash value growth by taking advantage of market growth without significant risk due to the protection of floors. Floors ensure that even if the market performs poorly, the cash value will not decrease below a certain level, often set at 0%.
• Lifelong Coverage: IUL provides lifelong coverage as long as premiums are paid, ensuring beneficiaries are provided for. The death benefit is generally tax-free, and beneficiaries can use it for various purposes, such as paying off debts, funeral expenses, income replacement, education, or preserving the family's standard of living.
• Higher Return Potential: IUL policies have the potential for gains in cash value that can be higher than other types of life insurance.
• Tax Advantages: The cash value accumulates tax-deferred, and the death benefit is tax-free for beneficiaries. Loans made against the policy are also often tax-free.
• No Social Security Impact: IUL policies do not affect Social Security benefits, allowing individuals to take a loan against their policy to supplement these benefits without reducing their benefit amount.
• Additional Benefits: IUL policies can include additional provisions, such as guaranteed premiums, guaranteed death benefits, and provisions for long-term care and critical illness.

Cons of Indexed Universal Life Insurance

While IUL offers several benefits, there are also some drawbacks and considerations to keep in mind.

• Growth Limitations: IUL policies have a cap on potential growth, which may limit policyholders from fully capitalizing on substantial market upswings. Despite floors protecting against significant losses, there is still inherent risk in tying a life insurance policy to a market index.
• Higher Fees: IUL policies often incur higher fees than other life insurance products, which can eat into the cash value, especially in the early years, reducing the overall return on investment.
• Active Management: IUL accounts require active involvement and understanding of market conditions, participation rates, and other factors, which may be demanding for some policyholders.
• Complexity: IUL policies are highly complex, and policyholders must understand how the policy works, including floors, caps, participation rates, and other factors, to manage it effectively.
• Risk of Lapse: IUL policies can lapse if premium payments are not maintained, resulting in the loss of both the death benefit and accumulated cash value.
• Taxable Events: Certain withdrawals or loans against the cash value may create taxable events if not appropriately managed.
• No Guaranteed Returns: While IUL offers the potential for higher returns, these returns are not guaranteed and may be lower than expected depending on market performance.

In summary, IUL offers the advantage of combining life insurance coverage with the potential for market-driven returns and tax advantages. However, it also comes with higher fees, complexity, and the need for active management. Whether IUL is suitable depends on an individual's financial goals, risk tolerance, and willingness to actively manage their policy.

How to buy indexed universal life insurance

Indexed universal life insurance (IUL) is a type of permanent life insurance that offers flexible premiums and a death benefit. It also provides a cash value component that can grow through an equity index account, which is based on the performance of a chosen market index such as the S&P 500 or NASDAQ.

• Understand your needs: Consider your unique situation and decide if indexed universal life insurance is the right choice for you. Evaluate the pros and cons of IUL and compare it with other types of life insurance, such as whole life or term life insurance.
• Seek professional advice: Consult a financial advisor or an insurance agent to understand the nuances of IUL policies. They can explain the potential returns, fees, and risks associated with these policies.
• Shop around: Research different insurance providers and compare their IUL products. Look for competitive guarantees, customization options, and the flexibility to meet your specific needs.
• Get a quote: You can get a universal life insurance quote online by answering some questions and choosing your desired death benefit amount and other policy details. You can also contact an insurance representative directly to guide you through the process and help you find the right policy.
• Select an index: When you purchase an IUL policy, you will need to select at least one stock market index to track the performance of your cash value account. The insurance company will provide you with several options to choose from.
• Understand the interest rate calculation: Know how the insurer will calculate your interest rate, earnings cap, and any fees that may be assessed. IUL policies typically have a minimum guaranteed interest rate and may also have a cap on the maximum interest you can earn.
• Review the policy details: Carefully review the IUL policy documents, including the terms and conditions, benefits, riders, and any potential penalties or consequences of loan and withdrawal. Make sure you understand the investment component and the associated risks.
• Provide required information: To purchase the IUL policy, you will need to provide personal information, such as your age, health status, and other relevant details.
• Make the premium payments: Once you have selected the policy and provided the necessary information, you will need to make regular premium payments to keep the policy active and ensure the death benefit protection.

Remember, IUL insurance is a complex product with an investment component. It is important to thoroughly understand the policy and seek professional advice before making any decisions.

How much indexed universal life insurance costs

The cost of indexed universal life insurance will depend on several factors, including your age, health, smoking status, and the desired coverage amount. Generally, you can expect to pay more for indexed universal life insurance than for a universal life insurance policy but less than you would for whole life insurance.

For example, a healthy non-smoker looking for $250,000 of coverage can expect indexed universal life insurance quotes near the following ranges:

• Prudential:
• PruLife Founders Plus Indexed UL
• Prudential Momentum IUL
• PruLife Survivorship Index UL
• Pacific Life:
• Pacific Horizon IUL 2
• Pacific Horizon ECV IUL
• Pacific Horizon Survivorship IUL
• Pacific Indexed Estate Preserver 3

Below are average annual premiums for a $500,000 indexed universal life policy for non-smokers in excellent health:

Age | Average Annual Premium

|

30 | $1,500

40 | $2,500

50 | $6,200

60 | $14,500

It's important to note that premiums are not guaranteed and will vary based on coverage needs, geographic location, health, and other factors.

When considering the cost of indexed universal life insurance, it's worth comparing it with other types of life insurance, such as whole life insurance and universal life insurance. Indexed universal life insurance offers the flexibility of adjustable premiums and death benefits, as well as the potential for higher growth in the cash value component. However, it is more complex and may require active monitoring to ensure the policy remains in force.

How indexed universal life insurance compares to other types of insurance

Indexed universal life insurance (IUL) is a type of permanent coverage that can last an entire life and build cash value. IUL policies are highly complex and come with more ups and downs than many other types of life insurance.

IUL vs Whole Life Insurance

Whole life insurance is a more straightforward form of permanent life insurance, with a guaranteed death benefit, fixed premiums, and a cash value component that acts like a savings vehicle. Whole life insurance is easier to understand but may not provide the upside that IUL can. Whole life insurance cash value grows at a fixed interest rate, while IUL insurance ties the cash value to the performance of a stock market index. Whole life insurance is generally more affordable than IUL insurance.

IUL vs Universal Life Insurance

Universal life insurance is permanent life insurance with an investment savings component. IUL insurance is a type of universal life insurance that provides a cash value component along with a death benefit. IUL policies are more volatile than fixed universal life policies but are less risky than variable universal life insurance policies. IUL insurance policies are generally less expensive than universal life insurance policies.

IUL vs Term Life Insurance

Term life insurance offers a fixed benefit if the policyholder dies within a set period of time, usually between 10 and 30 years. This is one of the most affordable types of life insurance, as well as the simplest, though there is no cash value accumulation. IUL insurance is significantly more expensive than term life insurance.

Frequently asked questions