What Is Indexed Universal Life Insurance?
What is UL vs VUL vs IUL?
Life insurance can be purchased in many forms and universal life is one of those forms. Universal life insurance is a permanent type of insurance that is based on a cash value. With this type of insurance, the insurer pays a somewhat higher premium than he or she would with a term life policy. A portion of that higher premium is used to pay for the life insurance itself and the remainder is placed into an investment portfolio.
Premiums are usually paid monthly and the portion that is used as investment is credited, with interest to the policyholder’s account. The portion that is used to pay for the insurance itself is deducted from the total amount of the monthly premium.. This is known as the COI or Cost of Insurance portion. In the event no payment is sent in for a month, the amount of the COI is deducted from the cash amount in the account.
The amount of interest that will be credited to the account is determined by the insurer. In many cases, this will be determined by a financial index of some type. Because only the amount of interest credited and not the cash value itself varies, universal life policies offer a stable investment option for some consumers.
It should be noted that there is a similar type of policy that was designed from aspects of the universal life policies and it is called the Variable Universal Life (VUL) insurance policy. VUL policies allow the cash value to be directed to a number of separate accounts that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential reward.
Indexed Universal Life – Why I Recommend This Product
Lastly, there are the Indexed Universal Life policies that work by investing in Index Options such as the S&P 500, the Russell 2000, the Dow, and other indexes. These types of contracts only participate in the movement of the specified index and do not participate in the actual purchasing of stocks, bonds, or mutual funds. I don’t want to gloss over these very important points. The cash value inside of an Indexed Universal Life (IUL) participates in the movement of stock and bond indexes without actually investing directly in the markets. When making application for your contract, you and your licensed agent will determine which indexes, level of participation and creating period your cash value will be subject to. You will have a variety of choices and can even combine strategies.
Another point of emphasis; when the indexes you choose post gains over the time periods your select for crediting, you make money. Ok, that make sense. Here’s is the best part, if the indexes lose money over the time period you select for crediting, you lose nothing. Yes, I said nothing. Your principal is guaranteed against loss. Your cash value participates in the upside potential of the markets with no downside risk.
With ordinary Whole Life and Universal Life, your cash value is guaranteed (if no-lapse UL) yes, but subject to prevailing interest rates only, not market potential. With Variable Universal Life, your cash value is not guaranteed and is subject to the swings of the markets. With term policies, you have no cash value accumulation, you are simply paying for a death benefit only.
If IUL Is So Great, Why Are Some People Still In Other Policies?
One reason people choose universal life policies is that they offer a greater potential for increasing cash value growth when the interest rates that are used for the policy outperform the insurer’s general account. People like the guarantee of the old standby Whole Life, it has been around for well over a century.
Universal life insurance is also more flexible than whole life insurance in two important ways:
The death benefit amount and often the premium payment amount are more flexible. Under certain conditions, the death benefit can be increased or decreased without actually losing the policy or having to begin anew as would be the case with whole life.
The second way universal life offers more flexibility is that it allows for a larger range of premium payments. These can range from the minimum amount allowed to cover the policy up to the maximum amount allowed by the IRS.
I think the main reasons there are fewer IUL’s, may be that IUL’s are newer products on the market and many Whole Life Policies have been in existence for years and years. Even UL’s are older products. As I have mentioned in other posts, Life Insurance underwriters look primarily at two issues: attained age and health status. So, many older individuals may not qualify to exchange and most often, regulators frown on exchanging policies for many very valid reasons.
Need Life Insurance? Ask About IUL
In closing, the main difference between whole life and universal life is that universal life shifts some of the risk for maintaining the death benefit to the insured. Conversely, with a whole life policy, as long as all the premium payments are made, the death benefit is guaranteed to be paid once the insured dies. With universal life, the policy will lapse and the death benefit will no longer be available if the cash value or premium payments are not enough to cover the cost of insurance. With IUL, you get the benefits with market upside potential and no downside risk.
Before purchasing indexed universal life, make sure you speak with a qualified broker or agent. He or she can answer your questions and help you decide which type of policy is best for you. Of course, you know I always recommend you speak with a CERTIFIED FINANCIAL PLANNER™who can help calculate the right amount of life insurance need and who is also life insurance licensed in your state of residence.
Please click on my products tab and check out the IUL products from the primary company I work with.
As Always, I welcome your comments and questions below. I will answer ASAP!