INDEXED UNIVERSAL LIFE INSURANCE
Index Universal Life insurance is a permanent universal policy and a hybrid of Variable Universal Life Insurance and Universal Life Insurance. The products came into the market in 1997 and have rocketed in popularity.
Index Universal Life has a few more moving parts, but keep in mind that they share the same basic components of other Universal Life products – they are permanent life insurance policies designed with the potential for non-guaranteed, tax-advantaged cash value build-up.
The way the policy’s interest is credited is where it differs from other Universal Life products. Index Universal Life is tied to an external index, typically the S&P 500. The interest credited to the policy will be based on the performance of that index, subject to a cap, a floor, and a participation rate.
For example, if an Index Universal Life policy has a 10% growth cap and the S&P 500 grows by 12% and it participates in the index 100%, 10% will be credited to the policy’s cash value. If the S&P 500 goes down -20% for the year and the policy has a 0% floor, 0% will be credited to the policy’s cash value.
The upside potential of the Index Universal Life policy is the opportunity for better performance than a Universal Life policy. The downside protection in a down market is due to the built-in floor which protects you, unlike a Variable Universal Life policy that has no floor. It’s important to note that, even with a floor, a policy still has charges deducted in down years.
Typical designs are:
- Designed for cash value growth for tax-free retirement income.
- Designed as a no-lapse guarantee substitute by offering lifetime guaranteed death benefits with some cash value growth.
- Designed for minimal premium requirements with some cash value growth for future flexibility.
- Designed for living benefits such as Chronic Illness and Long-Term Care with some cash value growth.