A Guide To Indexed Universal Life Insurance.

Shawn Plummer

CEO, The Annuity Expert

Indexed universal life insurance is a type of permanent life insurance policy offering several features and benefits that are not available with other types of insurance policies. It is designed to provide you with long-term financial protection and can also be used to save for retirement. In this guide, we will discuss the basics of indexed universal life insurance, including how it works and what its benefits are.

What is Index Universal Life Insurance?

Indexed universal life insurance is a type of permanent life insurance that allows policyholders to accumulate cash value. Your policy’s cash value is based on the performance of one or more stock market indexes, such as the S&P 500 Index. Your policy’s cash value increases when the stock market index goes up. However, your policy’s cash value will not go down when the stock market index goes down.

Some life insurance policies are split into two parts:

  • A death benefit that pays money to someone when you die.
  • The cash value can grow over time.

With Universal Life insurance policies, you can change the amount of money paid out when you die and use any gains from your cash value to pay for your premium.

The Benefits Of IUL

One of the main benefits of indexed universal life insurance is that it offers the potential for higher cash value growth than other types of life insurance policies. This is because you can participate in the stock market’s upside potential without worrying about the downside risk.

Another benefit of indexed universal life insurance is that it allows you to adjust your premium payments and death benefit amount. This means you can customize your policy to fit your unique needs and goals.

How Does Indexed Universal Life Insurance Work?

With an indexed universal life policy, you can allocate money towards a fixed component or prospective growth related to an index. The funds inside this plan will escalate due to any modifications in that specific index.

When deciding how much of your cash value goes into indices, there is no limit; numerous options are available for selection. Although these policies often use the S&P 500 price index, other broad indexes like Dow Jones Industrial Average and Nasdaq 100 can also be used as investment vehicles!

Here’s what your cash value could potentially look like with growth:

  • To be precise, insurance company interest credits rely on index activity – premium dollars are not invested straight into the index.
  • When the index increases, your cash value could earn interest based on a portion of its growth.
  • If the index falls, however, your cash value remains intact.
  • An IUL policy safeguards against index declines, known as the ‘floor,’ ensuring that your policy will always have a minimum interest rate.
  • When you purchase a policy with a 0% floor, your financial protection is guaranteed even when the index dips.
  • On the other hand, protecting yourself against losses limits your growth potential.
  • Indexed universal life insurance is a great way to grow your wealth, but you should be aware of certain restrictions. These include caps and participation rates that can limit the potential growth of your investments.
How Does Index Universal Life Insurance Work?

What makes Index Universal Life Insurance unique?

Some of the other benefits of indexed universal life insurance include the following:

  • Indexed universal life insurance policies offer death benefit protection that is tax-free.
  • Your policy’s cash value grows tax-deferred, so you will not have to pay taxes until you withdraw the money.
  • You can use your policy’s cash value for various purposes, including supplementing your retirement income, paying for long-term care expenses, or funding a child’s education.
  • Indexed universal life insurance policies offer the potential for higher cash value growth than other types of life insurance policies. This is because you can participate in the stock market’s upside potential without worrying about the downside risk.
  • Indexed universal life insurance policies allow you to adjust your premium payments and death benefit amount. This means you can customize your policy to fit your unique needs and goals.

Indexed life insurance (IUL) differs from other life insurance because the interest rates can change. This is because they are not set but based on an index chosen by the insurance company. Interest is earned based on the performance of that index.

What’s an index?

An index is a group of investments like stocks or bonds. The S&P 500 and the Nasdaq 100 are examples of indexes. For example, the insurance company doesn’t invest in the market but uses an index to set the interest rate for your policy.

Is IUL Interest Paid Monthly or Yearly?

IUL policies typically pay a death benefit and living benefit in interest payments. These payments can be made monthly or yearly, depending on the policy’s terms. Generally, payments are made annually at the end of each calendar year or when the policy matures.

In some cases, insurers may also offer monthly interest payments, but this is not always the case. Therefore, it is essential to read your policy carefully and understand when and how interest will be paid. Additionally, some policies may allow you to customize payment frequency to receive payments more frequently or less often than annual or monthly payments.

Regardless of the payment frequency, it is essential to remember that the amount of interest paid may vary yearly. Your insurer will likely provide you with a projected rate of return based on your policy’s specific terms and conditions; however, actual returns may be higher or lower than this projection.

Additionally, depending on the policy, there may be other fees or charges associated with the policy, such as surrender charges or administrative fees. Be sure to review your policy in detail, so you understand the potential costs associated with it.

Cash Value

Index universal life insurance has a cash value that you can use. You get to decide how you want to use it. There is a chance that you can make a lot of money with an indexed universal life insurance policy. But you need to track the cash value performance and if it is possible to access those funds. You can buy a traditional life insurance policy instead of an IUL. This way, you have extra money to invest in other things.

What Happens to The Cash Value of an IUL When The Policyholder Dies?

Universal Index Life insurance covers you in the event of death and allows you to reap its cash value benefits while alive. Yet this money will often go straight back to the insurer if it is not withdrawn or borrowed, leaving no opportunity for your beneficiaries when they need it most.

Universal Index Life Insurance provides a way to get more out of your life insurance policy. It combines the death benefit and the cash value features, allowing you to access both during your lifetime.

With Universal Index Life Insurance, you can increase your death benefit by investing part or all of your cash value into an indexed account that can be used to help pay for your retirement, college tuition, medical expenses, or other needs.

What Happens To The Cash Value Of An Iul When The Policyholder Dies?

Index Universal Life Insurance Pros

Most people don’t need life insurance for their whole life. But some people might need it to pay off debts, and others might want to pass on the family’s wealth without paying taxes. So permanent policies can be good. If you have enough money, an IUL policy can help you do these things.

You can grow your cash value more quickly if you buy an IUL with less risk. Then, if the market falls, you won’t lose money. You can also change how much death benefit coverage you want when needed.

Other indexed universal life insurance advantages include:

  • Similar to an IRA, your policy grows tax-deferred.
  • Like a ROTH IRA, you can pull money out of your policy without paying taxes.
  • Unlike qualified accounts such as 401(k) and IRAs, you can access the policy cash values pre-59.5 without incurring taxes or penalties.
  • Unlike a 401(k) and Traditional IRA, you can access the policy cash values without increasing your Social Security tax or Medicare premiums.
  • Your policy grows based on the performance of the S&P 500, subject to a floor and a cap.
  • Your beneficiary receives the death benefit income tax-free.
  • Some IUL policies offer both the cash value AND the death benefit to the beneficiaries at death.

Indexed Universal Life Insurance Cons

There are many different kinds of life insurance. IUL is one type. It is more expensive and complicated to understand than other types of life insurance. Why? The index and cash value are complicated, so you must be careful when choosing an IUL policy.

Your cash value may come with fees, and these can increase. In addition, you will have restrictions on how much you can withdraw, and there will be taxes if you take out more than what you put in.

The Different Types Of Indexed Universal Life Insurance

There are two types of indexed universal life insurance: participation and non-participation.

  • Participation policies allow you to participate in the stock market’s upside potential, but you will not be subject to downside risk. As a result, your cash value will fluctuate with the stock market, but it will never go below the guaranteed minimum interest rate.
  • Non-participation policies do not allow you to participate in the stock market’s upside potential but offer a higher guaranteed minimum interest rate. As a result, your cash value will grow slower, but it will be more stable than a participation policy.

What is The Difference Between Universal Life and Indexed Universal Life?

Universal life insurance is a form of permanent life insurance that combines a flexible premium payment with an investment component and death benefit protection. It allows policyholders to adjust their coverage amount and make additional payments into their policy to increase its cash value over time.

An indexed universal life (IUL) is an advanced form of universal life insurance. It offers duplicate flexible premium payments and death protection as a traditional universal life policy. Still, it combines these features with an additional investment component that allows policyholders to take advantage of market gains in the form of cash value growth.

The investment feature is the primary difference between universal and indexed universal life. With indexed universal life, policyholders can invest their premium payments in indexes based on the performance of specific markets. As a result, this type of insurance has a higher potential for cash value growth than traditional universal life policies but with greater risk. Additionally, indexed universal life policies may offer riders that allow policyholders to access their cash value without surrendering the entire policy.

Overall, both universal life and indexed universal life policies offer policyholders the ability to combine flexible premium payments with a death benefit and an investment component. Still, indexed universal life offers more potential for growth through the use of index-linked investments.

What Is The Difference Between Universal Life And Indexed Universal Life?

What Is Accumulation Indexed Universal Life Insurance?

Accumulation-indexed universal life insurance is a type of indexed universal life insurance that offers the potential for cash value growth. Your policy’s cash value will grow based on the performance of a selected index, such as the S&P 500. However, you will not be subject to the downside risk of the stock market, which means that your cash value will never go below the guaranteed minimum interest rate.

Accumulation-indexed universal life insurance policies allow you to participate in the stock market’s upside potential without worrying about the downside risk. This makes them an attractive option for people looking for a life insurance policy that offers long-term financial protection and the potential for cash value growth.

What Is Protection Indexed Universal Life Insurance?

Protection-indexed universal life insurance is a type of indexed universal life insurance that offers death benefit protection. Your policy’s death benefit will grow based on the performance of a selected index, such as the S&P 500. However, you will not be subject to the downside risk of the stock market, which means that your death benefit will never go below the guaranteed minimum amount.

Protection-indexed universal life insurance policies allow you to participate in the stock market’s upside potential without worrying about the downside risk. This makes them an attractive option for people looking for a life insurance policy that offers long-term financial protection.

If you need help finalizing your estate plan affordably, we recommend the following:

How To Open An Index Universal Life Insurance Policy.

Index Universal Life Insurance (IUL) Calculator

Use our calculator to compare the best IUL policies for permanent coverage with whole life insurance, then compare with term life insurance.

Next Steps

If you want a life insurance policy with the potential for higher cash value growth, indexed universal life insurance may be the right option. This policy allows you to participate in the stock market’s upside potential without worrying about downside risk. It also allows you to adjust your premium payments and death benefit amount. Contact us today for a quote on this and other life insurance policies. We would be happy to help you find the right coverage for you.

What Is Indexed Universal Life Insurance (Iul), And How Does The Policy Work?

Need Help Getting Life Insurance Coverage?

Contact us if you need help purchasing a life insurance policy. The service is free of charge.

Life Insurance Inquiry
First
Last

Frequently Asked Questions

What is the best-indexed universal life insurance?

Prudential, John Hancock, and Nationwide are the best-indexed universal life insurance plans. Due to low premiums and A+ financial ratings from A.M. Best, these companies are considered some of the finest indexed universal life insurance policies.

What is the IUL cash reserve?

IUL cash reserve is a feature of indexed universal life insurance. It’s a savings component that allows policyholders to accumulate cash value over time. The cash reserve is typically invested in indexed accounts and is accessible to the policyholder through withdrawals or loans.

Related Reading

*Disclosure: Some of the links in this article may be affiliate links. I may receive a commission at no cost if you purchase a policy. It helps us keep the lights on!

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

Scroll to Top