Best Indexed Universal Life Insurance: Smart Financial Planning

Universal life insurance is a type of permanent life insurance that offers the flexibility to adjust your premium payments and death benefit. It also includes a cash value component that grows tax-free. There are three main types of universal life insurance: guaranteed universal life, indexed universal life insurance, and variable universal life insurance. Indexed universal life insurance (IUL) is similar to traditional universal life insurance in that it offers a death benefit and a cash value account that increases over time. However, IUL policies have a greater growth potential since they are tied to the performance of stock market indices, such as the S&P 500 or NASDAQ 100. This means that policyholders can experience faster growth during periods of strong market performance, making IUL a popular option for those seeking a combination of life insurance and investment-like returns. When choosing an IUL policy, it is important to consider the cap and participation rates offered by different insurance companies, as these will determine the maximum growth potential and the extent of participation in index growth. Additionally, IUL policies may provide long-term care and chronic illness coverage, and offer tax benefits such as tax-free death benefits and tax-deferred growth of cash value. When selecting the best IUL policy, it is recommended to consider factors such as company strength, underlying fees, financial stability, and customer satisfaction.

Indexed universal life insurance pros and cons

Indexed universal life insurance, also known as IUL insurance, is a type of permanent life insurance that offers the benefit of market gains while building cash value and guarantees beneficiaries a payout upon death. IUL insurance puts a portion of the premiums toward annual renewable term life insurance, with the remainder added to the cash value of the policy after fees are deducted. The cash value is credited on a monthly or annual basis with interest based on increases in an equity index.

Pros

• Higher Return Potential: IUL insurance offers the potential for higher returns compared to other types of life insurance, such as traditional universal or whole life insurance policies.
• Tax-Free Capital Gains: IUL policies provide tax advantages, as the cash value accumulates tax-deferred, and the death benefit is tax-free for beneficiaries.
• No Social Security Impact: IUL insurance does not affect Social Security benefits, allowing individuals to supplement their retirement income without reducing their Social Security benefits.
• Greater Flexibility: IUL insurance offers flexibility in designing a policy around an individual's risk appetite and investment goals. Policyholders can adjust death benefit amounts and choose from various riders to customise the policy to their needs.

Cons

• Possible Limits on Returns: Insurance companies may set participation rates that determine how much of the index return policyholders receive each year, which can limit the actual rate of return.
• Unpredictable Returns: IUL policies offer variable returns based on market performance, which can be unpredictable. Policyholders must be comfortable with fluctuations in returns and potentially higher premiums.
• High Fees: IUL policies typically have higher fees and costs compared to other types of life insurance policies, including premium expense charges, administrative expenses, and fees and commissions. These fees can impact the overall rate of return.
• Risk of Premium Calls and Policy Lapse: If the index performs poorly, policyholders may be required to pay higher premiums to avoid a policy lapse. If premium payments are not made, the policy may lapse, resulting in the loss of the death benefit and accumulated cash value.

How indexed universal life insurance works

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 a policyholder's account can earn interest by tracking a stock market index, such as the Nasdaq-100 or the Standard & Poor's 500, selected by the insurer. If your policy also has a fixed-rate account, you can choose how much you want to allocate to each account.

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.

Indexed universal life insurance works similarly to universal life insurance. 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 towards 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 benefits

As with universal life insurance, indexed universal life insurance 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, although you may be asked to complete a life insurance medical exam if you apply to increase your coverage.

Earning interest

The cash value in indexed universal life insurance policies can earn interest in two ways:

• A fixed interest rate
• The performance of stock and bond indexes

You can choose to put the cash value in a fixed account, an indexed account, or a combination of both.

Fixed accounts

Fixed accounts grow at a fixed rate set by the insurer.

Indexed accounts

These accounts are slightly more complex. The cash value is placed in one or more sub-accounts that mirror the performance of a stock or bond index, such as the S&P 500. You can choose which accounts to invest in based on what the insurer has to offer. The insurer then pays interest to policyholders based on the performance of the index. As the index goes up, the account earns interest. If the index drops, the account earns less or nothing.

Floors and caps

The amount you can earn is subject to "floors" and "caps" to help minimize large swings in interest payments. The floor is the lowest your account rate can go and is usually guaranteed for the life of the policy but is often set at 0%. This means the account won't suffer losses if the market crashes.

The cap is the highest interest rate the account can earn, so if the market is up more than the cap, you'll only get credited for the cap amount. For example, if the cap is 10% and the index rises by 12%, you'll only earn interest of 10%. Unlike the floor, your insurer can change the cap while the policy is in force.

Participation rates

Caps are not the only way an indexed universal life insurance policy can restrict interest. There's also the participation rate. This rate dictates whether the cash value that you tied to a market index can fully "participate" in the gains of that index. A participation rate below 100% will further limit the interest you can earn.

Calculating gains

There are several methods insurers use to calculate gains in indexed universal life policies, such as the Daily Average method, the Monthly Point-to-Point method, and the Annual Point-to-Point method. Methods vary among policies and insurers. Be sure to carefully review the information provided and then double-check your understanding with your agent about the method used.

Best indexed universal life insurance companies

When it comes to indexed universal life insurance, there are several companies that stand out for their strong financial ratings, competitive pricing, and reliable policy illustrations. Here are some of the best indexed universal life insurance companies:

Prudential

Prudential offers three indexed universal life insurance products through Pruco Life Insurance Company. These policies provide a death benefit and the potential for cash value accumulation. Prudential's indexed universal life policies offer flexible premium payments and the ability to choose between a fixed interest rate or indexing your account to the performance of a specific market index, such as the S&P 500. Prudential also offers optional riders for additional protection.

Pacific Life

Pacific Life provides indexed universal life insurance products that offer death benefit protection and the potential for cash value growth. Their policies are known for their competitive guarantees and customization options. Pacific Life's indexed accounts credit interest based on the performance of major stock market indexes, while also providing protection against market downturns through guaranteed minimum interest crediting rates.

Mutual of Omaha

Mutual of Omaha offers two indexed universal life insurance policies: Life Protection Advantage and Income Advantage. Both policies are straightforward and easy to understand, tying your cash value to the performance of the S&P 500. Mutual of Omaha also includes living benefits for terminal and chronic illnesses, along with a range of optional riders to customize your policy.

Northwestern Mutual

While Northwestern Mutual does not currently offer indexed universal life insurance, they are worth mentioning for their strong financial position and high customer satisfaction ratings. They offer traditional universal life and variable universal life policies, with flexible death benefits, adjustable premiums, and tax-deferred cash value accumulation. Northwestern Mutual has superior financial strength ratings and a low complaint index.

Nationwide

Nationwide offers both variable universal life and indexed universal life insurance policies. Their variable universal life policies provide a wide range of investment options and indexed interest strategies. Nationwide also includes living benefits for chronic, critical, and terminal illnesses, as well as a long-term care rider option. Their indexed universal life policies provide flexibility and the potential for cash value growth.

These companies are known for their competitive indexed universal life insurance offerings, but it's important to compare their features, pricing, and available riders to determine which one best suits your needs.

How to choose the best indexed universal life insurance company

Indexed universal life insurance is a type of permanent life insurance that offers the flexibility to adjust your premium payments and death benefit. It also includes a cash value component that grows tax-deferred. When choosing an indexed universal life insurance company, it's important to consider various factors to ensure you select the best option for your needs. Here are some guidelines on how to choose the best indexed universal life insurance company:

• Assess your needs: Determine the amount of coverage you require by considering factors such as your age, income, debts, and anticipated expenses. This will help you choose a company that can provide sufficient coverage.
• Understand the different types of universal life insurance: Familiarize yourself with the three main types of universal life insurance: guaranteed universal life, indexed universal life insurance, and variable universal life insurance. Each type has unique features, so understanding these differences will help you select the most suitable option.
• Research and compare companies: Evaluate multiple indexed universal life insurance companies by considering their financial strength, customer satisfaction ratings, and the range of riders they offer. Look for companies with strong financial stability ratings, such as high AM Best ratings, indicating their ability to pay future claims. Also, consider companies with high J.D. Power customer satisfaction scores, indicating a history of positive customer experiences.
• Consider accessibility and customer service: Choose a company that provides multiple ways to interact with their services, such as a mobile app, online portal, and local agents. Good customer service and accessibility will be valuable if you need to make changes to your policy or require assistance.
• Evaluate cost and value: Compare the costs and benefits offered by different companies. Consider the premiums, internal policy charges, and the potential for cash value growth. Look for companies that offer competitive rates and provide value for your money.
• Seek expert advice: Consult a financial advisor or a licensed life insurance agent to guide you in choosing the right company and policy for your specific needs. They can provide personalized recommendations based on their expertise and help you navigate the complexities of different policies.
• Read reviews and testimonials: Explore reviews and testimonials from current and former customers of the companies you're considering. This can provide insights into their experiences with the company, including the claims process, customer support, and overall satisfaction.
• Analyze policy details: Carefully review the policy details, including the terms and conditions, riders offered, and any restrictions. Ensure that the policy meets your specific needs and provides the desired level of flexibility and customization.
• Consider long-term stability: Opt for companies with a strong track record of financial stability and longevity in the industry. This will give you confidence that the company will be able to honour its commitments over the long term.
• Request quotes: Contact the companies you're considering and request quotes for the coverage you require. This will allow you to compare the costs and benefits offered by each company, helping you make an informed decision.

By following these guidelines and conducting thorough research, you'll be able to choose the best indexed universal life insurance company that aligns with your unique needs and provides the coverage and flexibility you desire.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance that offers the flexibility to adjust your premium payments (within certain parameters). It has an investment savings element, loan options, and flexible premiums. You can also decrease or apply to increase your death benefit. Universal life insurance also typically includes a cash value component that earns interest or other investment gains that grow tax-deferred.

Universal life insurance policies are more flexible than whole life insurance policies. Policyholders can adjust their premiums and death benefits. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value. The COI is the minimum amount required to keep the policy active and includes the charges for mortality, policy administration, and other directly associated expenses. Premiums in excess of the COI accumulate within the cash value portion of the policy. As the insured person ages, the COI will increase, but this can be covered by the accumulated cash value.

There are three main types of universal life insurance: guaranteed universal life, indexed universal life insurance, and variable universal life insurance. The main difference between these types is how cash value grows. For example, indexed universal life policies are tied to an index, such as the S&P 500, while variable universal life policies are tied to investment sub-accounts.

The average cost of universal life insurance is $102 a month for a $250,000 policy for a 30-year-old female and $114 a month for a 30-year-old male. However, if your investments underperform or you underpay for too long, it could affect your death benefit or cause your policy to lapse.

Frequently asked questions