What is indexed universal life insurance?

How does an IUL policy work?

Like traditional universal life policies, IUL policies include a death benefit and a cash value account. An IUL policy's cash value grows based on a stock index (a set grouping of various stocks) instead of only through non-equity earned rates (fixed interest). Like universal life, IUL also offers the flexibility to adjust your premium as the cash value grows, with the potential to eventually achieve a zero-cost policy in which all premiums are paid for by your built-up cash value.

How is interest calculated on indexed universal life insurance?

IUL policies allow you to grow your cash value by putting a portion toward an equity index account that tracks the performance of a market index, like the S&P 500 or NASDAQ. When your selected index gains value, so too does your policy's cash value. Your IUL cash value will also have a minimum interest rate that it will always earn, regardless of market performance. Your IUL may also have an interest rate cap.

What's the difference between IUL and other types of permanent life insurance?

Indexed universal life insurance vs. universal life insurance

An IUL policy functions the same way as a traditional universal life policy, with the exception of how its cash value earns interest. An IUL's cash value increases based on the performance of the underlying index it's tracking, whereas a regular universal life policy's cash value earns a fixed interest rate. You may see higher returns with an IUL policy's cash value, though you may also pay additional fees.

Indexed universal life insurance vs. whole life insurance

If you're looking for permanent life insurance that's less complicated than a universal policy, whole life insurance builds cash value on a predetermined schedule. You don't need to worry about the performance of certain market indexes, and the premium will likely be less expensive with fewer fees than an IUL. However, you won't have the flexibility of adjusting premiums.

Learn more about the differences between indexed universal life insurance and whole life insurance.

Indexed universal life insurance vs. variable life insurance

Variable life insurance allows for even more flexibility than indexed universal life insurance, making it more complicated. Unlike an indexed policy, a variable policy's cash value may be entirely dependent on specific stocks you select. While you might have a fixed minimum death benefit on your variable policy, the performance of your cash value could drastically increase or decrease your beneficiaries' total payout upon your passing. Your premium could also be affected by how the variable portion performs, with lower performance leading to a higher cost. For this reason, variable life insurance is considered higher risk than whole or universal life policies, including IUL.

When does an indexed universal life insurance policy make sense?

IUL policies are more common among high-net-worth individuals who are looking for supplementary retirement income or life insurance. It's also used as "key person insurance," wherein a company takes out a life insurance policy on its owner or executive leadership to protect against a loss of profits in the event they pass away.

Keep in mind that higher premium costs and potential fees make IUL policies more expensive than other types of life insurance. If you're considering buying an indexed universal life policy, first speak with a financial advisor who can explain the nuances and give you an accurate picture of the actual potential of an IUL policy. Make sure you understand how the insurer will calculate your interest rate, earnings cap, and fees that might be assessed.

How to get universal life insurance

You can get a universal life insurance quote online. You'll answer some questions; then you'll choose your death benefit amount and other policy details. You can also call 1-866-912-2477 to speak with a licensed Progressive Life by eFinancial representative who can help you find the right policy for you.