We can say that indexed universal life insurance is a kind of everlasting life insurance, which implies that it also builds cash value and provides a death payment. Your provider may choose the index of stock markets used to calculate interest on the funds in your savings accounts, such as the Nasdaq Composite or the S&P 500.
In other words, as permanent insurance, indexed universal life insurance covers you for the rest of your life and includes a cash value account that generally increases tax-deferred. IUL policies relate the cash value account to a stock index, such as the S&P 500, to the other varieties of universal life insurance. On the other hand, to provide a point of comparison, cash value accounts in standard universal life insurance generate income depending on market interest rates.
Even though interest rates are not set, most funds have an interest rate commitment.
Essential Characteristics of Indexed Universal Life Insurance
Let’s look at some characteristics of indexed universal life insurance.
- Without a set interest rate
The National Association of Insurance Commissioners (NAIC) notes that when you buy indexed universal life insurance, the money in your cash value indexed account doesn’t earn a predetermined interest rate. Alternatively, your interest rate is determined by a market index set by your insurer.
(This is distinct from universal life insurance, which, according to the Insurance Information Institute (III), pays interest like a money market account.)
A basket of assets, such as stocks or bonds, is tracked by an index following the Securities and Exchange Commission.
According to the NAIC, your insurer chooses the index and then determines an interest rate based on the index’s performance.
Your cash value account receives credit from the life insurance provider for that interest.
- Guaranteed interest rate
According to the NAIC, plans often include a guaranteed interest rate, which ensures that a minimum interest rate is paid even if the index yields lower returns.
However, there is often an “upper cap” or limitation on interest rates.
The American Institute of Certified Public Accountants lists further benefits of indexed universal life insurance.
- Payments for adjustable premiums (within bounds)
Most likely, your coverage will include a scheduled premium for you.
However, if your cash value account has enough money, you may be able to utilize that money to contribute to the cost of your premiums.
- Adjustable death benefit
With an indexed universal life insurance policy, death payments are usually adjustable and may be decreased at any moment.
However, you may need to pass a medical test to increase the death benefit.
- Obtaining financial value
You may be able to borrow money from your indexed universal life insurance policy in an emergency, but you’ll probably have to pay interest for doing so.
Your cash value account can also allow you to withdraw money. But doing so can result in a permanent reduction in your death benefit. Withdrawals also risk making your policy expire if you don’t have a sufficient amount in your cash value account.
Who might decide to get indexed universal life insurance?
If you desire perpetual life insurance and wish to gradually increase your cash account balance, permanent life insurance can be an excellent choice.
According to the NAIC, indexed universal life insurance provides both the possibility for market-based development and protection against value loss if the market declines.
If you find these aspects desirable, you may want to think about indexed universal life insurance.
You may decide whether indexed universal life insurance can be the correct option for you with the advice of your insurance provider.
Suppose you desire lifetime life insurance and wish to build up your account balance over a lengthy period. In that case, everlasting life insurance can be a smart alternative for you to consider.
The National Association of Insurance Commissioners (NAIC) highlights that indexed universal life insurance provides coverage that shields policyholders from value erosion, even if the marketplace experiences a decline. You might consider getting indexed universal insurance coverage if these characteristics are desirable. If you have trouble deciding whether indexed universal life insurance is the correct choice for you, your insurance provider should be able to assist you.
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