Equity-Indexed Life Insurance: Benefits And Risks Explained

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index. It is more complex than other forms of permanent life insurance policies and offers no guarantees as to market returns. Equity-indexed universal life insurance, like all universal life insurance, builds a cash value that the insured can borrow against, invest with and use to cover increases in the cost of insurance.

How does equity-indexed life insurance work?

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index. It is more complex than other forms of permanent life insurance policies and potential investors may want guidance on how this policy works before committing to it.

With an equity-indexed life policy, the cash value rises with gains in the relevant market index. If the market drops, the cash value does not drop with it—the cash value simply won't rise. This type of policy tends to have lower premiums than other forms of whole life insurance.

Equity-indexed universal life insurance, like all universal life insurance, builds a cash value that the insured can borrow against, invest with and use to cover increases in the cost of insurance, potentially eliminating out-of-pocket premium payments should the cash value overtake increases in the costs of insurance. Policyholders need not choose one account in which to deposit the cash value accumulations. They may assign the money to several accounts, which tie returns to different indexes or to a fixed interest rate, in a proportion of their choosing.

Unlike variable universal life insurance, which allows policyholders to invest a portion of the cash value into a range of funds and stocks with various risk profiles, equity-indexed universal life insurance offers policyholders the opportunity to place the cash value in an equity index account, which pays interest according to a market index without actually investing the money.

What are the benefits of equity-indexed life insurance?

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index. It is more complex than other forms of permanent life insurance policies and potential investors may want guidance on how this policy works before committing to it.

The benefits of equity-indexed life insurance include the opportunity to grow your cash value faster. The cash value rises with gains in the relevant market index, but if the market drops, the cash value does not drop with it. Instead, it simply won't rise. This type of policy tends to have lower premiums than other forms of whole life insurance.

Like all universal life insurance, equity-indexed universal life insurance builds a cash value that the insured can borrow against, invest with and use to cover increases in the cost of insurance, potentially eliminating out-of-pocket premium payments should the cash value overtake increases in the costs of insurance. Policyholders can place the cash value in an equity index account, which pays interest according to a market index without actually investing the money.

Policyholders need not choose one account in which to deposit the cash value accumulations. They may assign the money to several accounts, which tie returns to different indexes or to a fixed interest rate, in a proportion of their choosing.

How does equity-indexed life insurance compare to other types of insurance?

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index. It is more complex than other forms of permanent life insurance policies and offers no guarantees as to market returns. It builds a cash value that the insured can borrow against, invest with and use to cover increases in the cost of insurance, potentially eliminating out-of-pocket premium payments should the cash value overtake increases in the costs of insurance. This type of policy tends to have lower premiums than other forms of whole life insurance.

Equity-indexed universal life insurance is more complex than other forms of life insurance. It is a form of advanced life insurance, a complicated life insurance vehicle that is difficult to explain or understand. It may not work as well for policyholders who prefer a hands-off approach and guaranteed returns.

Unlike variable universal life insurance, which allows policyholders to invest a portion of the cash value into a range of funds and stocks with various risk profiles, equity-indexed universal life insurance offers policyholders the opportunity to place the cash value in an equity index account, which pays interest according to a market index without actually investing the money.

With an equity-indexed life policy, the cash value rises with gains in the relevant market index. If the market drops, the cash value does not drop with it—the cash value simply won't rise. Policyholders need not choose one account in which to deposit the cash value accumulations. They may assign the money to several accounts, which tie returns to different indexes or to a fixed interest rate, in a proportion of their choosing.

What are the risks of equity-indexed life insurance?

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index. It is more complex than other forms of permanent life insurance policies and offers no guarantees as to market returns.

Risks of equity-indexed life insurance

Equity-indexed universal life insurance policies are a form of advanced life insurance and are therefore complicated and difficult to explain or understand. Potential investors may want guidance on how this policy works before committing to it.

One of the major problems with equity-indexed life insurance is the gross negligence of agents and companies in conveying the risks to clients. The risks are often spelled out in very specific, albeit confusing and overwhelmingly lengthy, language in the illustrations.

The cash value of an equity-indexed universal life insurance policy can decrease if premium payments outpace interest. The participation rate (the percentage of market increases by which the cash value grows) is usually less than 100%, meaning that the cash value will grow more slowly than the market as a whole.

Who should consider equity-indexed life insurance?

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index. It is more complex than other forms of permanent life insurance policies and offers no guarantees as to market returns. The cash value rises with gains in the relevant market index, but if the market drops, the cash value does not drop with it – it simply won't rise. This type of policy tends to have lower premiums than other forms of whole life insurance.

Equity-indexed universal life insurance may be a good option for those who are comfortable with a more complex life insurance vehicle and who are looking for potential hands-on opportunities to grow their cash value faster. It is important to note that this type of policy may not work as well for those who prefer a hands-off approach and guaranteed returns.

Investors should carefully consider their unique needs and insurability when deciding whether to purchase an equity-indexed life insurance policy. It is recommended that potential investors seek guidance on how this policy works before committing to it.

Frequently asked questions