Indexed Universal Life
Indexed Universal Life Insurance is a type of whole life insurance, an index life insurance, and a cash value whole life insurance.
It provides protection from the risk of premature death and from the risk of having insufficient funds to provide for a family or to cover healthcare costs in later life. But unlike traditional whole life insurance, it also returns interest on policy premiums and provides a creditor-proof asset as a hedge against inflation.
You may have heard the term Indexed Universal Life referred to by another name, Variable Universal Life, but they are essentially the same thing. Indexed Universal Life allows policy owners to enjoy the advantages of interest without subjecting themselves to the risks associated with stocks or mutual funds.
IULs are definitely one of the best ways to protect yourself from outliving your money and to ensure what you’ve worked so hard to save won’t be eaten up by inflation. That’s because they’re designed to help you achieve two very important financial goals – saving for retirement and tax diversification. Here’s what you need to know about IULs.
What Is Indexed Universal Life Insurance?
Life insurance policies are often viewed as a necessity. However, because coverage needs can vary significantly over time, it’s important to be aware of how life insurance works, the various policy options, and how the various components of your policy impact your overall bottom line.
There are two main types of life insurance: term and permanent. When purchasing a term plan, premiums are based on your life expectancy and the amount of term coverage you purchase. Examples include 20-year term, 30-year term, and level term. Once you’ve reached the end of the term, the plan will end and you’ll be responsible for the premium going forward.
Many people purchase a permanent life insurance policy as their needs change over time. Permanent life insurance, also known as cash value life insurance, is designed to maintain a death benefit and provide protection and savings over a period that could last for many years. Premiums are fixed and continue throughout the life of the policy.
These plans are designed so that you can access the accumulated value in the policy by taking out an advance. For example, an individual may choose to have two or three thousand dollars released for a particular purpose.
If you have the option, it’s ideal to indicate how you would like your premium to be used. This becomes apparent at a later date (when you decide to take an advance for instance).
How Do The Stock Investments Work?
The range of investment options is quite extensive and can include individual stocks, mutual funds, real estate, fine arts, gold, and precious jewels. These investment opportunities are flexible as well, allowing you to choose the type of investment to best suit your needs at the time. Growth, income, estate, and charitable planning are some of the options.
Investment company stock is included in almost all universal life policies today. Any stock investments are purchased for you. Paired with a good investment provider, your investments should grow steadily with time. Over time, the cost of your premiums for a universal life insurance policy will be offset by your investments and other earnings in your policy.
How do the investments convert income? Here is a brief description showing how it works: Lets say you pass away and the insurance company pays out all the insurance money that you invested. The insurance company invests the money and earns interest on the money and keeps the difference between what you started out paying in (the premiums) and what they told you you would receive. This interest is called the "mortality‖guaranteed interest rider."
How Does Indexed Universal Life Insurance Compare To Other Policies?
Indexed universal life insurance in some ways competes with whole life and universal life insurance policies because the benefits don’t change over time and are guaranteed.
But unlike whole life and universal life insurance, indexed universal life insurance policies don’t have any cash value like traditional whole life policies. In addition, there is a limit to how much you can deposit into an indexed universal life insurance policy.
Typically, the limit is about 20 to 30 percent of your mortality and expense policy amount. Also, the rate may increase a certain amount every year to keep up with indexings.
The benefits are tied to an index that allows the policy holder to benefit from the growth of the underlying market, without having to monitor daily market trading or bet on the direction of the market movements. The specific index used and its corresponding policies vary from company to company. Companies may offer one or more of the following indexes as an option:
- Credit Suisse USD BB International Equity Index
- S&P 500 Index
- Barra Value Index
{1}. Lehman Brothers U.S. Aggregate Index
{2}. Dow Jones Wilshire 4500 Full Cap Index
What Are The Advantages Of Indexed Universal Life Insurance?
In order to really understand indexed universal life insurance, you first have to understand the purpose of universal life insurance. This type of insurance provides the benefits of whole life insurance which include a death benefit, general life insurance and cash value combined with the flexibility and features of a variable universal life insurance.
This type of policy is sometimes referred to as a permanent insurance policy. The terms of this type of insurance tend to last throughout the life of the policyholder. Also, the premiums for universal life insurance tend to be higher than the premiums for term life insurance.
Note: You can have the death benefit from the regular universal life policy, and also from the universal life insurance with the added benefits of the indexed universal life insurance policy which make the policies last as long as you choose.
What Are The Disadvantages Of Indexed Universal Life Insurance?
There’s a lot of hype around indexed universal life insurance, but there are also some big downsides that people don’t know about until its too late.
The reason why people like indexed universal life insurance so much is because it promises consistent cash value growth and the opportunity to take advantage of current market rates. A portion of your premium is allocated to the indexed account. The rest is used to pay for the coverage you need, whether that’s long-term care or life insurance.
In an ideal financial world, indexed universal life insurance would be a great investment: a combination of a guaranteed cash value and a potential for market returns.
But sadly, the indexed accounts aren’t often as profitable as you’d like them to be, and the insurance is often so expensive that it can end up doing more damage than good.
Suitability of Indexed Universal Life Insurance
Indexation is the process of changing an insurance contract’s interest rates to reflect the changes in an index.
Indexed life insurance is based on the principle of taking your premium, dividing it among separate accounts and increasing the returns on those accounts each year. This investment approach allows the indexed policyholder to secure their savings over a long term. The insurance principle gives security to the policyholder to ensure that the savings in the account continue to grow at a reasonable rate even if the interest rates fall below the agreed inflation rate.
The Insurance Indexed Universal (IUI) and the Guaranteed Income Plan are the two indexed types of universal life insurance policies. These policies are different in their payout mechanism.
The IUI policy provides some benefits, but only if the insured commits by age 75, but you do have the option to withdraw funds early. The guaranteed income plan starts paying benefits immediately, but you could pay more in premiums for a higher payout.
Usually, both these policies are based on a 5 year indexing period, which is the time period for which the investment options are indexed and adjusted.
Since these policies are indexed, they sometimes may not reflect the true picture. Since 1999, indexed universal life insurance has been leveled by a declining interest rates.