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Indexed universal life insurance guide (IUL)

Fact-checked with HomeInsurance.com

Not all life insurance is the same — even though they serve the same function of providing compensation in the event of your death, they vary by length of time and payout functions. You have the option of choosing term coverage for a limited amount of time, and permanent life insurance that’s valid as long as you’re alive and paying your premiums. Within the permanent life insurance category, even more options are available. 

Depending on how you’d like to grow the cash value of your permanent life insurance policy, you may decide to go with a simple, whole life insurance policy that pays you a small amount of interest, or invest the cash value more aggressively for growth through an index universal life insurance plan (IUL). 

What is indexed universal life insurance?

When you buy permanent life insurance, the premiums you pay go towards two things: the death benefit that’s paid to the beneficiaries you name once you pass away, and a cash value amount you can access that grows throughout your lifetime. The most basic way the cash value grows is by earning interest the same way money in a savings account does. 

The trouble is, interest rates can often drop significantly, sometimes barely outpacing the cost of inflation. This can make cash value accounts less profitable than alternatives. For example if you had $100,000 cash, would you want to earn 0.01% interest in a savings account or invest in a mutual fund with a return of 4% or higher? 

An index universal life insurance policy invests your cash value into a fund that mirrors the performance of certain indexes of the stock market. For reference, the S&P 500 is the most popular index fund for investors. Historically, an S&P index fund returns over 10% per year on your investment. Since 2000, the S&P has had only 6 years of negative returns. The S&P index includes the heavy-hitters of the stock market including:

  • Amazon
  • Apple
  • Coca Cola
  • Facebook
  • Google
  • Home Depot
  • Johnson and Johnson
  • Microsoft
  • Netflix
  • Visa
  • Walt Disney

Investing your cash value into an index fund buys you a small piece of the growth and success of the household names above. 

Indexed universal life insurance vs other types 

As mentioned, an index universal life fund invests your money more aggressively. But there are other features to IUL life insurance. Here is how whole life vs IUL insurance compares:

IUL vs whole life vs universal life

Index life insuranceWhole lifeUniversal life
Type of insurancePermanentPermanentPermanent
Cash value?YesYesYes
Death benefit?YesYesYes
Level of returnGrowth from an index fundEarns interest similar to savingsInvested in the stock market
Level of risk to your cash valueModerateNoneHigher
PremiumsFlexibleFixedFlexible

IUL vs whole 

A whole life insurance policy is easier to understand and manage. You’ll know exactly how much your premiums will be for the life of the policy. The cash value grows predictably based on your contributions and the small interest you earn. 

An index universal life’s growth depends on how well the index fund it’s invested in is performing. You could have some up years and some down years. An IUL policy comes with more flexibility — you can reduce or increase your death benefit and don’t have a fixed payment to worry about. You pay your contribution requirement in a lump sum, quarterly or however you prefer. 

IUL vs universal

The main difference between IUL vs universal is how the cash value grows. They’re both flexible as far as premiums and death benefit changes. The main difference is a universal index life policy is invested in an index fund and universal life insurance can be invested in riskier equities. Depending on your comfort level with losing some or all of your cash value, an IUL may be a safer choice.

How does an indexed life insurance policy work?

When you choose a universal indexed life insurance policy, the cash value will be set aside in a special account. You may access the cash value over time to borrow against it or make limited withdrawals. The balance can be invested into an index fund such as the S&P 500 or Nasdaq. The cash value will grow (or drop) based on the performance of the fund you choose.

You can make adjustments to your IUL. You may decide to increase or decrease the death benefit amount. Your insurance company will provide you with the minimum amounts required to pay to keep your indexed universal life insurance policy in force. You don’t have to pay the amount as a monthly premium — annual or quarterly payments are also acceptable. At a certain point when your cash value is large enough, you may want to stop paying premiums and let your cash value investment grow.

Pros and cons of indexed universal life insurance (IUL)

To better understand how an IUL policy works, take a look at the indexed universal life insurance pros and cons.

Pros

  • More flexibility in making policy changes and payments
  • Adjusting the death benefit is possible
  • Better growth potential through a moderately safe index fund investment
  • Capital gains on investment growth are tax-free

Cons

  • No guarantee of market return
  • Your investment could drop in value
  • Returns are capped
  • No opportunity to earn dividends on your investments

Is indexed universal life insurance worth it?

If you’re looking for a way to get started in investing, an index universal life policy may not be a great fit for you. A large portion of the money you pay in premiums goes towards the death benefit and account fees. You’re better off opening an IRA for retirement or an investment account with a brokerage. 

Index universal life insurance is best for individuals who would like to provide loved ones with a tax-free payout and already have retirement savings and assets. An IUL policy is a tax-free way to realize investment profits or capital gains on extra money.

Is indexed universal life insurance good for retirement?

As mentioned, there are potentially better ways to invest for retirement, such as an IRA or 401(k). Gains from an IUL policy are capped, limiting how much your cash value can grow. In addition, you won’t receive any dividends earned from your investments, which could be valuable income at retirement. 

How to buy an indexed universal life insurance policy 

The best way to get started is to do your research on life insurance providers. Choose a few based on reviews, financial standing and recommendations. Request quotes to compare. Besides looking at premiums, examine life insurance providers’ fee schedules, terms and conditions before you choose a carrier. 

Look for what types of index funds are available through the carrier and the types of management fees the index funds available charge — index funds are passively managed and shouldn’t be as expensive as a mutual fund.

Companies that offer indexed universal life insurance

For reference, these are a few of the providers that offer indexed universal life insurance policies. 

  • Allianz
  • American National or ANICO
  • Lincoln Financial Life Insurance Company
  • Midland National Life Insurance Company
  • North American Company for Life and Health
  • Pacific Life
  • Penn Mutual
  • Symetra Life Insurance Company
  • Transamerica Life Insurance Company

The takeaway

  • Universal indexed life insurance is a good way to grow your cash value by investing the money into an index fund.
  • Although small, there is some risk associated with your cash value — there are no guarantees your funds will grow.
  • Besides the investment component, a UIL policy gives you greater payment flexibility and allows you to change the death benefit amount.

The combination of time and regular investing in an index fund is the safest way to grow your money significantly. When shopping for a permanent life insurance policy, it’s all too easy to go with the safe bet of a whole life insurance policy, but you’ll miss out on the flexibility and growth potential a UIL will give you.

Cynthia Paez Bowman

Writer

Cynthia splits her time between Los Angeles, CA and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development.

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