Indexed universal life insurance: A buying guide


The Ultimate Buyer’s Guide to Indexed Universal Life Insurance

Many people may want to think about universal life insurance since it combines many of the benefits of permanent, whole life insurance policies with premium payments that may be more affordable. As a whole life policy, a universal life policy offers perpetual death benefit protection along with a tax-advantaged cash value component1,2. In addition, premiums are adjustable; you can change your payments up or down within the limits outlined in the policy.


Indexed universal life (IUL) is a type of universal life that may appeal to people who want premium flexibility with the potential for better growth (than fixed rate UL) and downside risk protection (compared to VUL)3. Yet it’s not suited for everyone, in part because the policies are inherently complex. Key inquiries can be answered by reading this article:

What Is Indexed Universal Life Insurance?

• How does monetary worth increase?

What advantages and disadvantages exist for indexed universal life?


• How can I purchase it?

What Is Indexed Universal Life Insurance? The answer is a little complicated, as we’ve already mentioned. Reviewing the other two primary forms of universal policies, standard and variable UL, helps to provide some background for understanding how this sort of UL functions and the advantages it may offer.

A basic universal life policy (also known as a fixed-rate UL) offers permanent death benefit protection together with a cash value component and lets you adjust your premium payments within a set range; at the low end of that range, premiums can be comparable to those of a term life policy4. The death benefit can also be altered. Since they make the benefits of permanent coverage more accessible, flexible rates may be appealing to those with varying earnings. These UL policies can offer guaranteed cash value growth similar to a whole life policy, as well as the same types of tax deferral, loan collateral, and death benefit. But, it’s also crucial to keep in mind that minimum premium payments mean less cash value for growth, and expenses might eventually erode its worth, necessitating the payment of higher premiums in the future or the possibility of having your insurance coverage reduced.

The method used to determine cash value accumulation is the main distinction between standard UL and the other varieties. With a typical UL policy, the cash account balance is guaranteed to increase at the higher of the current market rate or a minimum interest rate. Hence, the yearly interest rate on a typical Guardian UL policy can go higher but will never go below the present minimum rate of 3.5%.

A variable universal life (VUL)5 policy may be preferred by those seeking possibly higher returns. You have the choice to link cash value growth to investment funds under these policies. You can choose how much of your cash worth to put in each choice because these policies are sold by prospectus, and the insurance provider provides you with performance history and fee information.

Growth in a VUL policy is not assured, while it is in a normal UL policy. Funds in your subaccounts are susceptible to market risk while using VUL: The value of your subaccounts (and cash worth) can increase in a favorable market year. The value of the subaccount can and will go off in a bad year.

Indexed UL offers greater growth potential than traditional UL and lower risk than VUL. These policies enable you to link the performance of a large-cap securities index, such as the S&P 500 Index6, to all or a portion of the increase of your cash value. The index just serves as a guide for how much interest the insurance credits to your account, with a floor and a cap for the minimum and maximum rates of return, unlike VUL, where your money is actively invested in the market. You won’t experience all of your reference index’s gains, but you also won’t experience any of its losses. As the floor is often set at 0%, in a year when the markets are down, your cash value amount will stay the same or even increase somewhat (since some policies set the floor above 0%).

How the cash value of an indexed UL policy increases

You must first decide how you want your cash account to be distributed for growth. You might be able to select from more than one index because each insurance company has its own selection of indices available. A part might also be able to go into a fixed-rate interest account.

For a certain index participation section, the cap is often the maximum credit allowed. Although some policies may have monthly restrictions, most policies have annual caps. At the conclusion of any section, caps may alter.

The “participation rate,” which is calculated as a percentage of the index’s gain, can also have an impact on performance. The amount allotted to the index, for instance, would increase by 5% if the reference index rose 10% and the policy’s participation rate was 50%. The participation rate for the majority of IULs is set at 100%, however this can alter.

What would truly happen to your account’s cash value in a successful year? Here’s an illustration based on the performance of the S&P 500 in 2017 and 20187. 2017 was one of the strongest years in the 2010s; the index increased by 21.83%. 2018 was the worst: the index lost 4.38%.

We’ll assume that on January 1, 2017, you had $10,000 in your cash account, of which you allocated 80% to the S&P 500 with an 11% cap, a 100% participation rate, and a 0% floor, and the other 20% to a fixed-interest account paying 3% to hedge your bets. To make things even simpler, we’ll suppose that no additional premium donations were made.

Overall, you would likely be content because your monetary value increased by roughly 9.4%. In this fictitious scenario, the growth rate was more than you would ordinarily receive from a standard UL policy or even from a full policy that pays dividends, yet there was no risk of loss. Provided you didn’t change your allocation

Your average cash value growth rate would have been close to 5% throughout this admittedly erratic two-year period. With far lower investment risk than a VUL policy, that is still often better than a normal UL policy. It’s crucial to keep in mind that this example is not “typical,” though. The policy’s cap, floor, participation rate, and fixed interest rate, as well as the performance of the reference index and costs deducted for the cost of insurance, are just a few of the many factors that may have changed the outcome of the 2-year performance period.

The Benefits and Drawbacks of Index Universal Life Insurance

An index policy offers the same permanent coverage and premium flexibility characteristics as other types of UL, with the following fundamental variations based on the cash value growth calculation:

IUL offers greater growth potential than a normal UL policy, but less growth potential than a variable UL without performance restrictions.

• Downside risk: Unlike a variable UL policy, which lacks a performance floor to cap subaccount losses, only the amount allotted to a fixed-value option is guaranteed to grow under an IUL policy. If the reference index falls, it won’t grow at all (assuming a 0% floor).

Whole Life Insurance versus Indexed Universal Life Insurance

Both types of policies offer permanent protection with an investment component that can grow over time, but IUL (like other UL policies) gives you, the policyholder, the option of raising or lowering your monthly payments8, giving you greater flexibility to deal with changing circumstances. In addition, an indexed UL policy provides you with one or more index-based options that can accelerate the growth of your cash value while reducing your exposure to downside risk. Yet, there are drawbacks as well: The cash value needs to be maintained to some extent, if only to make sure that your cash value doesn’t fall below a minimal threshold, because IUL policies are more complicated and the growth and expenses are decoupled. If you merely pay the minimal premium amount, your cash value may cease increasing and, in some situations, even decrease if the expenses outweigh the cash value growth. This could cause you to make greater payments later, reduce the death benefit amount, or cancel coverage entirely.

In comparison, whole life insurance policies are far more straightforward, offering level premiums, more guarantees for cash growth9 (albeit with less upside potential), and fewer (if any) investment alternatives. Yet, whole life policy premiums frequently cost more than IUL policy minimums.

Term Life Insurance vs Indexed Universal Life Insurance

Term life insurance is the most straightforward type of life insurance protection: With a conventional term policy, you pay a predetermined monthly premium for 10, 20, or 30 years, and if you pass away during that time, your family will receive a death benefit. The coverage is just transitory, has limited flexibility to adapt to changing conditions, and has no cash value. After your term policy goes into force, the only significant modification you can make is to change it to a whole life policy.

In comparison, indexed UL provides you with a more complex and flexible financial strategy with long-term rewards. You can cut your rates (within the bounds of the contract) to a level that might be equal to a typical term premium while still receiving permanent life insurance cover. In addition to the certainty of a performance floor that can assist lower risk, you receive the benefits of cash value with the possibility for larger growth (compared to other types of permanent life). IULs, like whole life policies, can also offer tax-advantaged estate planning advantages not offered by temporary term insurance.

How to Get a Universal Life Insurance Policy with Indexing

This product might be extremely specialized and valuable. If you believe that these financial products are appropriate for you, we advise that you seek expert advice in order to find the best solution for your circumstances. Consult a financial expert who has experience assisting clients in obtaining long-term life insurance to discuss your circumstances. Get a recommendation from a friend or coworker if you are not familiar with the person.


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