You probably already know the distinction between permanent and term life insurance if you’ve recently been thinking about the several types of life insurance you have to choose from. Universal life insurance and Whole life insurance are examples of the several kinds of permanent life insurance.
If universal life insurance appeals to you, you can apply for standard UL coverage or an indexed UL policy. However, you should know the many variations between these two policies before applying.
Universal Life Insurance (ULI)
Universal life insurance and permanent life insurance offer lifetime protection for your premiums. In addition, ULI comes with the opportunity to accrue cash value on your policy. Your ability to pay will determine whether you can lower or raise the premiums on a universal life policy.
Universal life insurance offers fewer guarantees than whole life insurance policies if your premium payments are low for an extended period. However, the growth of your cash value will be at its highest when your premium payments are significant.
Benefits of universal life insurance
- Adjustable premiums. The ability to adjust the size and frequency of your payments under universal insurance might be helpful when circumstances are challenging. However, paying lower premiums could result in a policy lapse, so consult a financial advisor before making any significant adjustments to your premium payments.
- Potential increase in financial value. The interest rate on the funds in your cash value account will be determined by your insurer and is subject to periodic modifications.
- Flexible death benefit. Although you’ll probably need to pass a life insurance medical exam to be eligible for the additional coverage, your policy may allow you to enhance the death benefit if you need more. Conversely, you can reduce your death benefit after the insurance has been in effect for a few years.
Indexed Universal Life Insurance
Indexed universal life insurance is another long-term policy that accrues cash value. These policies use an equity index account to generate cash value growth. Once sufficient cash value has accrued, you can utilize it to lessen or completely cover your premium without affecting your death benefit.
Benefits of indexed universal
- You have control over the payments and death benefits.
- You can increase or decrease your payments depending on your need for coverage, the expansion of your cash account, and your financial status.
- IUL policies can grow more than conventional universal life insurance as premiums are not fixed.
- You can choose the extent of your coverage. Although, you might have to undergo a medical examination to raise the death benefit.
- Stock market-influenced cash-value account returns. As a result, these accounts increase as the market expands, and this expansion is frequently accumulated tax-deferred.
How These Two Insurance Types Differ
The standard universal life policy and indexed universal life insurance are pretty similar. The primary distinction is in how the programs create financial value. Cash value in indexed universal life insurance permits growth in a stock index, which is a collection of several equities. Universal life insurance offers cash growth at non-equity earned rates.
You can improve your cash value when you purchase an indexed universal life policy by investing a portion of it into an equity index account, in which the NASDAQ and S&P 500 are the most popular. Equity index accounts rise based on how the overall market performs rather than non-equity earned rates.
Remember that your interest rates will continue to change. Every universal life policy has a minimum interest rate that will be earned regardless of the state of the market. An interest rate cap, which restricts how high-interest rates can be, is also included in some index universal life insurance contracts. These policies typically have higher fees and premiums because the cash growth through an IUL policy has the potential to be more beneficial for you.
Ensure you understand how your insurance provider will determine your earnings cap, rate of interest, and any possible fees before applying for one of these policies. After learning how universal life insurance and indexed universal life insurance differ, you now know how to choose the best policy.
Mack Hales has spent the past 4 decades helping clients prepare for retirement and manage their finances successfully. He also works with strategies that help clients put away much more money for their retirement than they could in an IRA or even a 401k. We involve the client’s CPA and/or their tax attorney to be sure the programs meet the proper tax codes.
Mack works with Federal Employees to help them establish the right path before and after retirement. The goal is to help the client retire worry-free with as much tax-free income as possible and no worries about money at risk of market loss during retirement.
Mack has resided in Gainesville, GA since 1983, so this is considered home. Mack is married to his wife of 51 years, has two boys and five grandchildren.