Indexed universal life insurance in 2024. A complete guide.
Indexed universal life insurance
Indexed universal life insurance is quickly becoming one of the most desired insurance and investment options, but what is indexed universal life, and how does it work?
Indexed universal life, or IUL, is a complicated insurance product with many benefits. However, like any insurance product, it has some drawbacks (depending on your circumstances.)
Like most life insurance, your needs will determine whether the product is suited to you.
This insurance offers the growth potential of index-based interest rates and provides guaranteed minimum interest rates, but it isn’t without risks.
We will discuss all there is to know about indexed universal life insurance to help you decide if it’s right for you.
Table of contents
- What is indexed universal life insurance?
- How does indexed universal life insurance work?
- Is indexed universal life insurance a good choice for me?
- Indexed universal vs. whole life insurance
- Indexed universal life insurance vs. other insurance
- Benefits of indexed universal life insurance
- Drawbacks of indexed universal life insurance
- Indexed universal life insurance cost
What is indexed universal life insurance?
Indexed universal life insurance (IUL) is a permanent type of life insurance. It’s designed to last your lifespan, build cash value, and include a death benefit.
Unlike other universal policies that grow cash value through non-equity earned rates, an IUL policy lets you grow some cash value through an equity index account.
IUL policies place cash value in sub-accounts that mirror a stock index.
These policies offer fixed account options that earn set-rate interest as an alternative to indexed accounts.
Like all universal life policies, you can use your cash value to lower or potentially pay for your premium without affecting your death benefit.
How does indexed universal life insurance work?
Indexed universal life insurance works like standard universal life policies, with the exception of how they accrue cash value.
Like universal life, IUL allows you to adjust your premium rates as your cash value grows. You can then achieve a zero-cost policy with premiums paid for by your built-up cash value.
In addition to policy flexibility, there is the potential for more growth based on the stock index (various stock groups) compared to only through non-equity earned rates. However, your cash account’s growth is not guaranteed.
With this option, you need to monitor your cash value because your premiums will increase if it goes down to zero. The policy could also be void, or the death benefit may be reduced.
Key features of indexed universal life insurance
To summarize, here are key features of an indexed universal life policy.
No fixed interest rate
Funds in your cash value account don’t earn a fixed interest rate with indexed universal life. Your interest rate is based on a market index.
Interest rate guarantee
Typically, IUL policies include a guaranteed minimum interest rate, so that’s paid even if the index produces lower returns. However, interest rates are subject to a cap or upper limit.
Adjustable premiums
You can plan your premiums and use your cash value account to pay your premiums once you have accrued enough funds.
Adjustable death benefit
You can usually lower your death benefit anytime. Doing so may require you to pass a medical examination.
Access to the cash value
You may be able to withdraw funds from your cash value account, and you might be able to borrow from your policy, although you will likely be charged interest to do so.
Withdrawals from your cash value may also permanently reduce your death benefit and lead to a lapse in your policy.
Is indexed universal life insurance a good choice for me?
Indexed variable life policies are more expensive than other types of life insurance.
This permanent life insurance option might be right for you if you want lifelong protection and investment options while building a cash-value account.
Indexed universal life insurance offers growth potential and simultaneously offers protection against losses if the market falls.
Speak with a financial advisor if you are considering an indexed universal life policy. Your insurer can help you decide whether it’s right for you.
Indexed universal vs. whole life
Whole life insurance tends to be a more straightforward permanent option than universal life.
Whole life builds cash value on a set schedule and doesn’t rely on the performance of certain market indexes.
Indexed universal life insurance is more expensive, with more fees than whole life insurance.
However, a universal policy offers the flexibility of adjusting premiums and the potentiality of a paid-up policy.
Whole life
- Policy duration: Permanent
- Flexible premiums and death benefit: No
- Cash value earnings calculation: Fixed rate
- The cash account value can decline: No
Indexed universal life
- Policy duration: Permanent
- Flexible premiums and death benefit: Yes
- Cash value earnings calculation: Stock and bond indexes, fixed interest rate options
- The cash account value can decline: Yes, with exceptions
Indexed universal life insurance vs. other insurance
Indexed universal life vs. variable life
Variable life insurance is more complicated (and flexible) than indexed universal life.
The cash value of a variable policy may depend on your chosen stocks, while an indexed policy isn’t dependent on them.
Your cash value’s performance could change your beneficiaries’ total payout even if you have a fixed minimum death benefit on your variable policy.
Your insurance premium could also be affected by how the variable portion performs, with poor performance leading to a higher cost.
Generally, poor performance leads to higher costs, making variable life insurance a higher risk than whole or all universal life policies.
Indexed universal life vs. term life
Term life insurance is a more affordable way to protect your loved ones financially.
Unlike indexed universal life insurance, term life insurance is designed to last for a fixed term, typically between 10 to 30 years.
If you pass away during the policy’s term, your beneficiaries won’t have to worry about interest rates or higher premiums.
Benefits of indexed universal life insurance
There are many benefits to indexed universal life insurance.
This coverage offers permanent protection and is among the most flexible life insurance plans.
In summary, here are some of the benefits of indexed universal life insurance.
Flexible plans
Unlike other financial insurance products, this type of coverage offers permanent life insurance protection with advantageous flexibility.
Returns are driven by the market
With indexed life accounts, your cash value grows when the stock market grows, and that growth is often beneficially tax-deferred.
You have control
Depending on your financial situation and needs, you have the option to increase or decrease your premium payments.
You can also change the amount of your coverage, but that may come with additional checks, such as a medical exam.
Drawbacks of indexed universal life insurance
Here are some of the drawbacks of indexed universal life insurance.
Potential inconvenience
You need to actively participate in your investments and monitor your policy. You may have to pay more into your account to prevent your policy from lapsing during periods of low returns.
Costly fees
The fees of indexed life coverage can eventually increase and may take value from your cash account or increase your payments.
Potential risks
The return on your investments might not do as well as you predict if indexes don’t rise as projected. This issue could lead to extra costs to keep your policy from lapsing.
Limits
You are limited from fully participating in the market’s success by caps on returns and participation rates. They may also decrease over time which will further limit your returns.
Key takeaways
Indexed universal life, also known as IUL, is a permanent type of life insurance. IUL is designed to build cash value while covering you for life.
Unlike other universal policies, an IUL policy lets you grow cash value through an equity index account.
Like all universal life policies, you can use your cash value to lower or potentially pay for your premium without affecting your death benefit.
Indexed universal life insurance works like standard universal life policies, with the exception of how they accrue cash value. Like universal life, IUL allows you to adjust your premium rates as your cash value grows.
An IUL policy offers protection, tax benefits, and added flexibility like whole life insurance.
The benefits of IUL include flexible plans, returns driven by the stock market, and you have more control of your plan than most financial products.
The drawbacks of IUL include the potential inconvenience of monitoring your account, the costly fees, the potential risks involved with investments, and the limits on your account.
Indexed universal life insurance cost
The cost of indexed universal life insurance depends on the following factors:
- Age
- Gender
- Occupation
- Medical history
- Smoking status
- Coverage options
- Limits and deductibles
When considering any type of life insurance, ensure you understand the policy terms before purchasing.
Indexed universal life insurance quote
Pitsas Insurances provide competitive life insurance packages for those wanting to protect their family or loved ones in the event of death.
We can help you review your investment goals and insurance needs and help you find the right policy.
Pitsas Insurances offer extremely flexible life insurance at highly competitive rates.
We offer you the following:
- Tax benefits and deductions
- Immediate mortgage payment cover
- Coverage of expenses for your children’s education
- Considerable financial income for your family members
- Options to connect a policy with your medical insurance to save up to 25%
To learn more about our life insurance plans, see our website.
To receive a hassle-free life insurance quote, see here.
Pitsas Insurances Team
Limassol, Cyprus