Index Universal Life, Explained
Written by
Evan Romo
Saturday, February 25, 2023

With February being Insure Your Loved Ones Month, now is a great time to take a look at a unique life insurance policy, Index Universal Life. Index Universal Life, or IUL, is a permanent policy. There are no terms on the length of this flexible policy, and can become a great investment tool all while providing its purpose as a life insurance policy. Let’s read more about it.

An IUL is comprised of the death benefit and a cash account. These two are funded by the premium you pay and the interest earned through the cash account which is based on a stock index, such as the S&P500. This is similar to a Universal Life Policy, even down to the name, but an IUL has key differences in how the policy operates.

An IUL separates itself with how it operates. The policy has an extra level of flexibility in how if you are ever unable to pay your premium, your cash account can pay it for you. Depending on how much interest you are earning in your cash account, the policy can simply pay itself. However, if you are not earning as much in your cash account, and it is what’s paying your premium, you will be losing money with this strategy.

The cash account is a major difference between an IUL and a different permanent policy. A Universal Life Policy, for example, has a fixed interest rate based on market index. The interest earned on an IUL is based on the stock market that it is tied to. A stock’s index fluctuates as opposed to a market interest rate which means your cash account can grow above the market rate when the stocks are doing well. On the contrary, if the stock index is below the market index, your cash account will grow at a slower rate. This ultimately makes the IUL a risky policy to have.

You can maintain this risk through floors. Floors essentially keep your cash account from going beneath a certain percentage. If the stock market were to crash, but your floor was 0%, you wouldn’t face the negative percentages from this crash. On the other side, there are caps which keep your account from exceeding a certain percentage. This prevents you from getting to reap full benefits from a rising stock market, but it ultimately provides you some control over your cash account.

Combining this wealth generating tool with a life policy that protects you and your family is a supersized coverage. The death benefit remains flexible to your needs which make an IUL something accessible to everyone. If your premium becomes too high, you can adjust your policy throughout it’s lifetime. Because of the flexibility of the IUL, it will require more attention to it as strategy can lead to more interest earned. But with wise and careful decision make, an Index Universal Life policy can be a powerful asset to you and your family.

You can learn more about Index Universal Life with one of our Life and Health Specialists. Give us a call!

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