What Is an Indexed Universal Life Insurance & How Does It Work?

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An increasing number of insurance products are being developed and introduced to the market to attract customers. One of them is indexed universal life insurance. This product offers protection against unforeseen events and allows the owner to profit from stock market fluctuations with minimal risk. Let’s break down indexed universal life insurance and how it works.

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What Is an Indexed Universal Life Insurance?


Indexed universal life insurance is a form of permanent life insurance providing lifetime coverage as long as the premiums are paid.

For the most part, indexed universal life insurance components are similar to the standard universal insurance policy, including paying a death benefit to the named beneficiaries after your deceased and permitting the insured to accumulate their wealth through invested cash value. The interests gained from cash value are tax-free and can be used to pay premiums.

The unique feature of this relatively new insurance approach is the cash value generation over time. Specifically, it uses the performance of the predetermined index on market capitalization to calculate the amount of interest received in return.


How an Indexed Universal Life Insurance Works

After choosing indexed universal life insurance as your primary coverage, the insurance agent will provide the policy summary, death benefit details, and a list of indexes from well-known stock exchanges (e.g., Nasdaq, S&P 500). Essentially, indexed universal life insurance is characterized by the following features:

  • Cash value accumulation: The insurance companies use the rise and fall of the stock market to determine the amount put into the account.
  • Floor rate: Most indexed insurance policies offer a zero-floor guarantee to protect the insured from market crashes.
  • Cap: A cap keeps your cash value below a certain percentage even if your chosen index performs well.
  • Participation rates: Participation rates are often set by the insurance carriers and used as one of the determining factors for the cash value.


When getting an indexed policy, the risk is significantly lower because the policyholders are not required to invest the cash value directly in the stock market. Still, it will be credited based on the chosen equity index.

The owners can allocate the cash value to two options: fixed or equity index accounts. You can select one or more indexes and decide how many percentages you want to put into the index account.

Since your monthly interest mainly depends on the stock market’s rise and fall, most insurance companies invest in mortgages or bonds. Therefore, to get the final number of how much interest you will receive after each month, the insurance will track and compare the index values at the start and end of the month. In most cases, the earnings are credited into the account annually or every five years.

Another perk of buying indexed universal life insurance is that the owner is granted the right to adjust the amounts of premiums and death benefits if needed. Additionally, you can borrow the cash value against the policy for personal reasons. But expect to have the same amount deducted from your death benefits if you do not repay the loans.

RELATED: What Is Universal Life Insurance & How Does It Work?


Pros & Cons of Indexed Universal Life Insurance Policies


Everything comes with pros and cons. While indexed universal life insurance policies stand out from their attractive features, it’s necessary to understand their benefits and downsides to decide whether or not it’s the right insurance plan for you and your loved ones.


Advantages of Indexed Universal Life Insurance

  • Reduced Risk: No cash directly invested in the stock market means less risk.
  • Flexibility: The insured is allowed to adjust the premiums amidst the policy duration and alter the size of death benefits within limits according to their preferences.
  • Larger Cash Value Growth: The indexed universal life insurance’s cash value growth is larger than other permanent insurance plans due to the set minimum interest rates.
  • Permanent Death Benefits: The death payouts are permanent and not subject to income. Thus, no probation is required.
  • Easy Access: The insured can access their funds at any time.
  • Tax Benefits: The interest and death benefits are not subject to tax.


Disadvantages of Indexed Universal Life Insurance

  • Complexity: It cannot be easy to fully understand how indexed universal life insurance works.
  • Capped Earnings: The accumulation percentages can be capped, limiting your earning potential regardless of how good your index’s performance is.
  • Equity Index Dependence: Since the cash value is tied to the market, you will receive no interest if your index goes down.
  • Active Management Required: Getting a hold of the indexed universal life insurance can be a real challenge. But it doesn’t end there because you must be proactive in managing your plan.


Cost of Indexed Universal Life Insurance

Like other types of insurance plans, the cost of indexed universal life insurance depends on your chosen insurance carrier and the scope of your policy.

In addition to premiums, indexed universal policies also come with numerous additional costs, such as administrative fees, sales commissions, surrender charges, actual insuring costs, etc.

When shopping around for such a policy, most insurance companies will show you an illustration of how the interest rates work based on the stock index. However, it’s vital to remember that predicting the stock market is impossible, and you should focus only on guaranteed policies rather than the illustrated outcomes.


Is Indexed Universal Life Insurance a Right Investment?

Essentially, this insurance product allows you to earn extra money and protect yourself and your family from the unexpected. Still, it should be first viewed as your safety net rather than an investment tool.

Furthermore, indexed insurance plans are costly and require lifetime commitment when paying premiums; consult with a financial advisor first to comprehensively understand indexed universal life insurance before stacking money on the table.


If you have any questions about indexed universal life insurance, please get in touch with us to receive a free consultation. 


Quotetopia matches you with what you’re looking for! We make your search a single step based on coverage and cost information from hundreds of top insurers, connecting you with the best match at the best value. From auto to health to life insurance, Quotetopia has you covered. 



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