Indexed Universal Life Insurance
Universal life insurance is a whole life life insurance product that incorporates a savings or cash value feature into the life insurance protection. It is called whole life because the policy has no term, it never expires as long as you continue to pay the premium or until you decide to cash out.
Indexed universal life insurance or equity indexed universal life insurance is called such because the cash value of the policy is tied to a certain financial index, if that index makes gains, so does the cash value of the policy, but if that index goes down, the cash value of your policy will also drop, or at least not grow. The index most typically used to determine the growth of an indexed universal life policy is the S&P 500.
Most indexed policies guarantee a minimum rate of return, even if the index is falling. That minimum rate is generally between 2 and 4%.
The idea with indexed life insurance is that you can take the most advantage of good market growth with your life insurance product. There are other whole life products out there including traditional whole life insurance and variable universal life. Indexed universal life differs from each of these.
Traditional whole life insurance offers more safety, but you pay for that safety with a lower rate of return. Variable Universal life will let you earn more as markets climb higher, but don’t have the guaranteed minimum returns, allowing your cash value to actually fall.
Is Indexed Universal Life Insurance the perfect life insurance?
Generally, no. But, if you think it’s for you, there are a few things you should know before you buy any whole life insurance policy:
- What is the rate of return? With most whole life products, you will have to be an actuary or a CPA to be able to determine the actual rate of return on your cash value account. Know that with an indexed policy, you won’t make the same gains as the actual index your policy is tied to. Rather, you’ll make what is called a “participation rate” which is a percentage of the index increase.
- How much do I pay in fees? The fees and commissions are incredibly high on whole life insurance products. Generally, none of the money you pay in the first year of your contract will accumulate any cash value, rather it will be used up in fees and commissions. If you do buy a whole life policy, be prepared to hang in for the long haul.
- What is the cap on earnings? Most indexed policies are capped at 10 – 14% earnings. Granted, there is the minimum earnings guarantee of 2 -4%, but be aware you will not make what the index is making in it’s best times.
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Related posts:
- Permanent Term Life Insurance
- Term Versus Whole Life Insurance
- Whole Life Vs Term Life Insurance
- The Advantages of Whole Life Insurance
- Whole Life Insurance Cash Value
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