Index Universal Life Insurance Definition

Indexed universal life insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. The money in your cash value account can earn interest based on a stock market index chosen your insurer, such as the S&P 500 or the Nasdaq Composite.

Index Universal Life Insurance Pros And Cons

  • Indexed universal life (IUL) insurance includes a death benefit and a cash value, which grows at an interest rate controlled your insurer
  • There is a minimum guaranteed interest rate, but your actual rate varies based on the performance of a chosen investment fund and could outperform other cash value policy
  • Policies also allow you to adjust the death benefit and pay your premiums with your cash value
  • IUL is more expensive and complex to manage than standard-term or whole-life insurance
  • Index Universal Life Insurance Vs Whole Life

    Whole life insurance is designed to be exactly that—life insurance. In contrast, indexed universal life insurance policies are more like retirement-income vehicles. Cash inside of these policies grows on a tax-deferred basis and can be used to pay premiums

    There are downsides to any permanent life insurance policy in that they are generally more expensive and more complex than term life insurance policies. But the primary downside of IUL insurance is that it’s a confusing product. Why is it so confusing? Because there are a lot of complications and nuances associated with the index and the growth of the cash value.

    For instance, the earnings may be capped; if the S&P 500 earns 8% but your policy is capped at 4%, you won’t see the full growth reflected in your cash value. Indexed universal policies don’t take into account dividend yields, which creates another situation in which your interest rate wouldn’t match the index growth. There may also be participation rates or "point to point" timeframes that limit when interest is calculated and applied to your cash value.

    Your growing cash value may also come with fees, which may be subject to increases throughout your policy’s life and are often higher than the fees on a traditional investment account. And if you want to withdraw from your cash value, you’ll encounter restrictions and taxes if you withdraw more money than you’ve paid into the policy.

    Term life insurance is very straightforward in comparison: you pay the premiums, and the death benefit is paid out if you die. Even whole life insurance is easier to manage once you understand how the cash value component works. With IUL, you need to spend a lot of time studying your index options or be very comfortable with the guidance of the company from which you're buying to make an informed insurance choice.