Indexed Universal Life Insurance

Indexed Universal Life Insurance (IUL) is a type of permanent, cash-value life insurance. Like universal life insurance (UL), IUL lets you adjust your coverage level, premium amounts, and payment frequency.

IUL Background

Life insurance companies continue to develop new products to meet changing financial and estate planning needs. For many years, whole life insurance provided permanent death benefits with fixed premiums and guaranteed minimum interest, but it lacked flexibility.

Universal life insurance adds flexible policy features not found in whole life. UL gives you options regarding the timing and amount of premium payments and the opportunity to change your death benefit (increasing the death benefit may require additional underwriting). UL policy cash values earn a minimum interest rate and may earn higher interest if the policy issuer’s investments perform favorably. However, the amount of interest credited to cash values is controlled by the issuer.

IUL combines the guarantees* of WL and the policy flexibility of UL with the chance to have cash-value growth tied to the performance of an equity index, but without exposure to losses resulting from unfavorable index performance.

Note: *Guarantees are subject to the financial strength and the claims-paying ability of the insurance issuer.

How Indexed Universal Life Insurance Works

IUL is a form of universal life insurance that credits excess interest to your cash value. Instead of earning a fixed interest rate, your cash value grows based on a selected market index, such as the S&P 500. If the index performs well, your policy earns interest. If the index performs poorly, most policies still credit a minimum interest rate. Several factors determine how much interest your policy earns.

The Equity Index

Insurance companies tie IUL policies to indexes like:

• Dow Jones Industrial Average

• S&P 500 Index

• Various bond indexes

The credited interest depends on the gain in the selected index over a specific index term

Index Term

The index term defines the period over which performance is measured. Some terms last one year; others last two years or longer. After the term, the insurer calculates the credited interest.

Participation Rate

The participation rate determines how much of the index gain your policy receives.

For example:

• If the index gains 20%

• And the participation rate is 90%

• Your policy earns 18% (20% × 0.90)

Some insurers offer participation rates of 100% or more. A lower rate reduces your credited interest.

The Cap

The insurance company may impose an additional limit on the amount of interest credited to your cash value with an interest rate cap. The cap, generally expressed as a percentage, is the maximum amount of interest that can be credited to your cash value during the index term.

Referring to the previous example, if a cap of 12% is applied in addition to the participation rate, then the total amount of interest credited to the cash value is 12%, not 18%.

IUL Features

IUL offers permanent insurance with flexible premiums and death benefits. It credits cash value based on equity index gains. Some policies guarantee a minimum death benefit. Coverage remains active as long as premiums are paid. A lifetime death benefit option keeps coverage in place for life but may increase premiums.

Accessing Your Cash Value

Your IUL cash value grows tax-deferred. You do not pay income tax on credited interest while it remains in the policy.

You can access funds in two ways:

• Withdraw up to your premium basis tax-free

• Take policy loans

However, withdrawals and loans reduce your cash value and death benefit. Surrender charges may also apply.

Other Factors to Consider

IUL has more “moving parts” than most UL policies. Consider:

• Participation rates

• Interest caps

• Crediting methods

• Surrender charges

• Annual insurance cost increases

During periods of negative index returns, cash value may earn little or no interest. Reducing or skipping premiums may require higher payments later to maintain coverage or prevent policy lapse.

Is Indexed Universal Life Right for You?

IUL may suit you if:

• You want permanent life insurance

• You prefer flexible premiums

• You plan to hold the policy for 10+ years

• You want growth potential without direct market risk

• You value downside protection with upside limits

Always research the insurer carefully and check their financial ratings before purchasing.