What Is Indexed Universal Life Insurance?

Your financial situation is unique, so it’s important to find a life insurance product that meets your specific needs. If you’re searching for lifetime coverage, indexed universal life insurance is one option you may want to consider.

Like other permanent life insurance products, these policies allow you to build cash value you can tap during your lifetime. However, indexed universal life (IUL) offers higher potential returns and more flexibility than whole life.

Features of Indexed Universal Life Insurance

IUL insurance is permanent coverage that offers a guaranteed death benefit and a cash value component that grows over time. These policies have two features that set them apart from other types of cash value life insurance.

Returns Are Tied to the Stock Market

With an IUL policy, your cash value is tied to an investment index such as the S&P 500. The better the market performs, the more your cash value grows. That means you have more long-term growth potential than a whole life policy, which offers a fixed rate of return. But you also experience more volatility since your returns aren’t guaranteed.

Typically, IUL policies prevent you from experiencing losses in years when the index loses value. However, they also cap your interest credit when the index goes up. For example, a policy with an 8 percent annual cap gives you an 8 percent return at most, even if the applicable market index grows by 12 percent.

Alternatively, the policy may have a participation rate that determines how much of the market’s gain is credited to your cash value account. For example, if you have a participation rate of 50 percent and the index grows by 12 percent during the year, you’d receive a credit for 6 percent.

Premiums and the Death Benefit Are Flexible

Unlike other life insurance products, universal policies allow you to adjust your premium payments as your financial situation changes. If your budget allows, you can pay more, which increases your cash value. If your finances are tight, however, you can choose to lower your premium—as long as you meet the minimum required to keep the policy in force.

With IUL insurance, you can also modify the death benefit over time. This flexibility can be useful if your financial needs change, such as having more dependents or taking on additional financial responsibilities.

How to Tap into Your Policy’s Cash Value

Once you accumulate a sufficient balance, you can tap into your policy’s cash value for various financial needs in a few ways.

Make a Withdrawal

You can make partial withdrawals from the cash value, which reduce the policy’s cash value and possibly the death benefit.

Take Out a Policy Loan

You can borrow from your life insurance’s cash value. The loan amount plus interest is deducted from the death benefit if you don’t repay the loan.

Pay Premiums

You can use some of your cash value to pay your premiums. This option can help keep your policy in force if you experience a loss of income or other budgetary constraints.

Surrender the Policy

When you cancel your policy, you receive your cash value minus any surrender charges and outstanding loans. Your coverage will no longer be active when you surrender your contract, so carefully consider the potential consequences.

Pros and Cons of Indexed Universal Life

Indexed universal life insurance can be a versatile financial tool. However, understand the advantages and disadvantages of this product to determine whether it aligns with your financial goals.

Pros

• As long as you pay the premiums, the policy remains in force for your entire life.
• You can accumulate cash value you can use during your lifetime for various financial needs.
• You can adjust your premiums and death benefit if your circumstances change.
• You have higher growth potential than whole life products since your returns are tied to the stock market.

Cons

• Permanent life insurance policies often have higher initial premiums than term insurance, so it may not be the right choice if you’re on a tight budget.
• The cap on interest credits can limit the upside potential in years when the stock market performs well.
• Your policy could lapse if you take out too large of a withdrawal or policy loan.
• IUL insurance may have surrender charges if you cancel your policy within a certain time.

Is Indexed Universal Life Insurance Right for You?

IUL insurance can be a valuable financial tool if you’re seeking permanent life insurance coverage with the opportunity for larger returns than a whole life policy. Because your cash value growth is tied to a stock market index, there may be years when you experience little, if any, gain in your cash balance. But over the long term, your gains during years of stock market growth could make up for those down years.

IUL products can be particularly attractive if you have unpredictable income or experience job insecurity because of their premium flexibility. If you can’t pay your original premium, you can reduce your payments within the limits outlined in your contract.

In general, permanent life insurance policies might not be the right fit if you’re on a tight budget and your main goal is to financially protect your family or business for a specific period. In that case, term insurance could provide the protection you need at a lower cost.

Securing Coverage for Your Situation

With the potential for more robust returns and adjustable payments, indexed universal life insurance may be an option you want to consider. However, if fixed annual returns and locked-in premiums are important to you, a whole life policy may represent the better choice for permanent coverage.

Curious to learn which insurance product suits your needs? Reach out to a financial professional at Colonial Penn, who can review your personal situation and provide customized insight.

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