Index Universal Life (IUL)
Indexed Universal Life (IUL) Insurance
If you’re looking for insurance that offers the flexibility of universal life and a cash account with higher growth potential, you might want indexed universal life insurance. Indexed universal life, or IUL, gives you a chance to experience some of the upsides of the stock market while limiting risks.
While that may sound simple, there are lots of options, fees and forecasts to understand. Since IUL ties cash value to the stock market, it comes with more ups and downs than other types of life insurance. But for a savvy investor looking for a policy with a higher-touch investment arm, indexed universal life could be the perfect fit.
Indexed universal life insurance is a type of permanent life insurance that pays interest based on the movements of the stock market. It’s a subset of universal life insurance, which means policyholders can change payments and benefits as needed.
The cash accounts tied to an indexed universal life policy can grow quickly, but they can also see years without any growth. Eventually, you may even grow the account to the point you can stop making premium payments.
How indexed universal life insurance works
Like other forms of permanent life insurance, indexed universal life offers a death benefit and a cash account. The death benefit is determined at the beginning of the policy, but can change. The cash account grows based on the performance of a stock index.
A stock index, such as the S&P 500 or Dow Jones Industrial Average, is a way to track a group of stocks. Insurance companies pick one or more of these and pay interest to policyholders based on the index’s performance — as value goes up, the account earns interest. If the index drops, the account earns less or nothing.
Cash accounts are first funded through premium payments. After the cost of insurance (covering your death benefit), rider charges and other fees come out, the rest is added to your cash account. If you ever decide to skip a payment or underpay, those fees can be taken directly from the account.
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%.
Caps are the highest interest rate the account can earn, so if the market is up more than the cap, you’ll get credited only for the cap amount. Unlike the floor, your insurer can change the maximum rate while the policy is in force.