Insurance companies are always trying to develop new insurance products to meet their clients’ needs. While the idea of life insurance started out as a simple concept, through the years, it has evolved into much more. There are dozens of different kinds of insurance plans.
Indexed Universal Life
One new product they’ve recently developed is indexed universal life insurance, and there are pros and cons to indexed universal life insurance.
These policies are interesting because they allow you to use your life insurance funds to invest in the stock market. Additionally, they can be one of the most confusing types of policies that you can purchase. There is a lot of confusing surrounding these plans and the benefits that they offer. It’s vital that you understand all of the options and the advantages of each kind of plans. We want to help you understand indexed universal life insurance plans.
Is this policy a good fit for you?
Let’s take a look…..
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is a combination of other types of life insurance. First off it is a type of permanent life insurance. This means that it’s a policy that’s meant to last your entire life; it doesn’t eventually expire like term insurance. Indexed universal life also builds up cash value, which is money you can take out and spend while you are alive.
Since indexed universal life insurance is a type of universal policy, the amount you need to pay each month isn’t fixed.
You get to decide how much you can pay each month, usually with a minimum requirement. However, if you don’t pay enough into your policy, it could run eventually run out of money and expire.
How Do The Stock Investments Work?
What is unique about indexed universal life insurance is that it invests your cash value in the stock market, using a market index like the S&P 500. This means your cash value growth is based on how well the stock market performs. If the market goes up, you can earn more money with these plans. However, if the market goes down, you won’t earn anything.
The good thing about these policies is that they can’t lose money.
If the stock market crashes, your cash value won’t go down; it just won’t grow that year.
How Does Indexed Universal Life Insurance Compare To Other Policies?
Since indexed universal life insurance is a permanent policy, it is much more expensive than term insurance. You’d likely pay about ten times as much per month for the same death benefit. If you are looking for life insurance at the lowest possible cost and don’t mind that it expires, term is a better choice. If you want to permanent coverage or want to combine your life insurance with an investment plan, indexed universal life insurance could be a better choice.
Compared to whole life and universal life, indexed universal life insurance costs about the same per month. The main difference is how these accounts manage your cash value.
Whole life has a guaranteed, annual return so you know exactly how much this account earns. Universal life earns an interest rate that can change depending on the market interest rate. This goes up and down, but at least you earn something each year.
Indexed universal life has the most variation since your return is based on the stock market. When the market is good, you’ll earn the most money with these policies. When the market is bad though, you won’t earn any money with these policies.
What Are The Advantages Of Indexed Universal Life Insurance?
Indexed universal life insurance works best as a combination of your retirement plan and life insurance. As a stock investment, these plans can’t lose money which can be very appealing to some investors. This gives you a way to put money in the market without the worry of dealing with market losses.
In addition, indexed universal life policies can offer tax-free growth on your investment gains. As long as you keep your cash value in the life insurance, you don’t need to pay taxes on your stock income. If you take money out as a loan, you also don’t have to pay taxes on your investment gains. This means you can invest with this account and never have to pay taxes on your stocks.
Lastly, these policies give permanent insurance coverage so you never have to worry about your policy expiring; provided you make your monthly premium payments.
What Are The Disadvantages Of Indexed Universal Life Insurance?
The problem with indexed universal life insurance policies is that they can be a bit expensive. Between paying for the insurance coverage, administration expenses, and insurance agent commissions, it could take off about 2-3% of the return you would have gotten by just investing in the stock market.
Some policies also cap your gains. This is the trade-off for not having investment losses. You lose less when the market is bad, but earn less when the market is good.
The other problem with indexed universal life insurance is that to buy a policy, you need to meet an insurance company’s minimum health standards. If your health is poor, your policy will be more expensive and some people can’t qualify at all.
Suitability of Indexed Universal Life Insurance
These policies work best if you need permanent life insurance and want to invest your cash value in the stock market. These policies don’t tend to earn as much as a regular brokerage account so they aren’t as attractive as a pure investment. However, the fact that you can’t lose money with indexed universal life is attractive for investors that don’t like risk. If you can’t stand losing money and don’t mind a lower total return, these policies could also be appropriate.