On March 9, 2021, Advice Chaser will host chartered life insurance underwriter Jerry Barrowman in a webinar on the topic “Should IUL Be Part of Your Financial Strategy?” We’ll discuss what index universal life insurance is, the pros and cons, and how to purchase a policy that suits your needs.
Index universal life insurance is an increasingly popular product, accounting for 20% of new policies. People choose it as a happy medium between the risk of variable universal life insurance and the low returns of standard universal life insurance.
What Is Index Universal Life Insurance?
Index universal life insurance is a type of whole life insurance, meaning it lasts your whole life, unlike term life insurance. What makes IUL insurance unique is that it earns interest based on the performance of economic indexes—numbers that tend to follow the performance of the stock market as a whole.
Your account consists of two portions: the death benefit, which remains steady, and the cash account. When you pay your premium, the first portion goes toward the death benefit, the next to fees, and the remainder goes into the cash account. This amount earns interest in an equity index account. You earn money based on how well the index—for example, the S&P 500 or NASDAQ-100—performs. However, since your money isn’t actually invested, if the index performs poorly, your account doesn’t lose value. However, this doesn’t mean it’s a risk-free proposition, as we’ll discuss in a minute.
Your earnings are limited by both a ceiling and a floor: you can’t earn less than a certain amount (often 0%) and you can’t earn more than a certain amount either. Unlike the floor, the ceiling can change during the life of the policy.
Advantages
An index universal life insurance policy gives you flexibility. For instance, you can often choose to pay a smaller premium if the cash value in your account can cover it. You can control how much of your cash account is allocated to indexed accounts and even change the amount of your death benefit.
Over time, the economy as a whole almost always grows. Since indexes mirror the performance of the economy, over the long term, an indexed account will earn money. That means an IUL, while not strictly guaranteed a given rate, will grow most years. Often it grows at a higher rate than other types of whole life insurance.
The cash account of IUL insurance can work as an emergency fund or for retirement. Since life insurance policies aren’t taxed, and IUL accounts can be accessed without penalty at any age, they can be a good supplement to your other retirement funds.
Index universal life insurance policies often come with a variety of riders, or additional benefits. You can select riders that cover long-term care, disability payments, and more.
Disadvantages
With so many advantages, you may wonder if there’s a catch. In fact, some financial advisors treat index universal life insurance with suspicion. IULs are more risky than regular whole life insurance because the earnings can increase or decrease without warning. While these earnings can be higher than the steady rates of whole life insurance, they are lower than you’d get investing the money directly.
Also, when earnings are low or zero, you can lose money on fees. The fees involved in an IUL may be higher than other products, with the result that you need to earn money on the account to cover them. If you aren’t earning, you’re losing money. When that happens, you may need to increase your premium spending. If you can’t afford to do that, you can lose the entire policy.
Not everyone selling an IUL insurance policy is trustworthy. Unlike stocks, IULs are not regulated by the Securities and Exchange Commission (SEC). Any insurance provider can sell them to you, complete with optimistic projections that don’t pan out. Some will even suggest taking out a loan to buy their policy with. This is a risky choice, given these policies are not guaranteed to earn any given rate.
Lastly, these policies can be complex, beyond what a potential buyer can easily understand. How much you can earn on the cash account, how much of the cash account can be used to earn money, and how the earnings ceiling can change over time can all hide in lengthy policy documents.
For all of these reasons, if you want to buy index universal life insurance, get good independent advice first. Your insurance sales representative has a vested interest in whether you buy the product. Instead, speak to a financial advisor before you commit to anything.
Learn More at Our Webinar
Want to be a savvy consumer who can take advantage of these products without suffering the pitfalls? Our webinar on March 9 will get you started. Sign up here, and come at noon Mountain Time with all your questions.
