Indexed Life Insurance Policy
There are several different types of universal life insurance. One of these is known as indexed universal life insurance. In many ways, an IUL policy is similar to a traditional universal life insurance policy.
For instance, like a traditional universal life insurance policy, an IUL policy offers low-cost permanent life insurance coverage, along with the tax-deferred growth of the policy’s cash value component.
However, one unique feature that relates to IUL is the fact that the return on the policy’s cash value is linked to an underlying market index, such as the Dow Jones Industrial Average (DJIA) or the S&P 500.
With an indexed life insurance policy, there is typically a minimum guaranteed rate of interest on the cash value funds, as well as the indexed account option. Also, the principal in an IUL policy’s cash value is also protected, as these policies can guarantee that the cash will not be subject to a negative return if the underlying index takes a fall in value during a given time period.
In return for this safety of principal, IUL policies will also typically impose a “cap” on how much the cash value may grow in a given time frame – even if the underlying index performs exceptionally well. Because of this, the cash value in an IUL policy will not rise and/or fall identically to the index that the policy is tracking.
There are many benefits to owning an indexed life insurance policy. For instance, these policies are a type of permanent life insurance. So, the coverage will remain in force for the remainder of the insured’s lifetime (provided that the premium is paid).
The cash value in an indexed universal life insurance policy can provide a type of “best of both worlds” scenario, as it allows the opportunity for market-linked returns, while at the same time keeping principal safe in times of a market downturn.