What is Indexed Universal Life Insurance (IUL)?
Indexed universal life (IUL) insurance is a type of permanent life insurance, which means it can last your entire life and builds cash value. An IUL policy allows for cash value growth through an equity index account, unlike other universal policies that only grow cash value through non-equity earned rates. Like with all universal life policies, once you've built up enough cash value, you can use it to lower or potentially fully pay for your premium without lowering your death benefit.
How does an IUL policy work?
Like traditional universal life policies, IUL policies include a death benefit and a cash value account. An IUL policy's cash value grows based on a stock index (a set grouping of various stocks) instead of only through non-equity earned rates (fixed interest). Like universal life, IUL also offers the flexibility to adjust your premium as the cash value grows, with the potential to eventually achieve a zero-cost policy in which all premiums are paid for by your built-up cash value.
How is interest calculated on indexed universal life insurance?
IUL policies allow you to grow your cash value by putting a portion toward an equity index account that tracks the performance of a market index, like the S&P 500 or NASDAQ. When your selected index gains value, so too does your policy's cash value. Your IUL cash value will also have a minimum interest rate that it will always earn, regardless of market performance. Your IUL may also have an interest rate cap.
What's the difference between IUL and other types of permanent life insurance?
Indexed universal life insurance vs. universal life insurance
An IUL policy functions the same way as a traditional universal life policy, with the exception of how its cash value earns interest. An IUL's cash value increases based on the performance of the underlying index it's tracking, whereas a regular universal life policy's cash value earns a fixed interest rate. You may see higher returns with an IUL policy's cash value, though you may also pay additional fees.
Indexed universal life insurance vs. whole life insurance
If you're looking for permanent life insurance that's less complicated than a universal policy, whole life insurance builds cash value on a predetermined schedule. You don't need to worry about the performance of certain market indexes, and the premium will likely be less expensive with fewer fees than an IUL. However, you won't have the flexibility of adjusting premiums.
| Indexed universal life vs. whole life | Indexed universal life | Whole life |
|---|---|---|
| Interest rate | Variable, based on market index | Fixed |
| Premiums | Adjustable | Fixed |
| Coverage | Lifelong | Lifelong |
Indexed universal life insurance vs. variable life insurance
Variable life insurance allows for even more flexibility than indexed universal life insurance, making it more complicated. Unlike an indexed policy, a variable policy's cash value may be entirely dependent on specific stocks you select. While you might have a fixed minimum death benefit on your variable policy, the performance of your cash value could drastically increase or decrease your beneficiaries' total payout upon your passing. Your premium could also be affected by how the variable portion performs, with lower performance leading to a higher cost. For this reason, variable life insurance is considered higher risk than whole or universal life policies, including IUL.
What's the difference between indexed universal life vs. whole life insurance?
The main difference between whole life insurance and indexed universal life (IUL) insurance is how the cash value operates. Whole life insurance cash value grows based on a fixed interest rate. In contrast, insurance companies tie IUL cash value to a stock market index's performance. IUL also differs from regular universal life insurance, which has a cash value that grows based on non-equity earned rates.
What are indexed universal life and whole life insurance policies?
A whole life insurance policy covers you for life. It has cash value that grows at a fixed interest rate and is the most common type of permanent life insurance. Indexed universal life insurance is also permanent, but it's a specific type of universal life insurance with cash value tied to a stock market index's performance rather than non-equity earned rates.
All universal life policies can increase or decrease your premium as your cash value grows. Your cash value can also increase your death benefit. These features don't apply to whole life policies.
Advantages of whole life vs. IUL
Premium and fees
Whole life insurance provides the stability of a fixed premium, and it's generally more affordable than indexed universal life insurance. On the other hand, IUL offers the flexibility of adjusting your premium and even skipping payments as your cash value amount allows. But it also comes with additional fees that could vary vastly from payment to payment due to the complex nature of the policy's structure and cash value.
Value growth
Whole life insurance cash value grows at a guaranteed fixed rate. It's main benefit to the policyholder is the ability to take out a life insurance loan if needed. IUL value has a minimum guaranteed interest rate. However, the policy ties the rest to the performance of a set grouping of stocks like the S&P 500 or NASDAQ. This makes IUL value growth riskier and also potentially more rewarding, depending on market performance. Additionally, IUL cash value may eventually grow enough to result in a no-cost policy — that's when the built-up value can pay for all your premiums.
Death benefit
With a whole life policy, your death benefit is fixed (as long as you don't have a loan on the policy when you pass away). Suppose your whole life cash value amount grows to equal the policy's death benefit when you reach a certain age (usually 100–120). Then, the insurer will pay out the face amount directly to you and terminate your policy. Contrastingly, with IUL policies, your death benefit can increase as your cash value grows, leading to a potentially higher payout for your beneficiaries.
