Top Class Actions’s website and social media posts use affiliate links. If you make a purchase using such links, we may receive a commission, but it will not result in any additional charges to you. Please review our Affiliate Link Disclosure for more information.
How Does an Indexed Universal Life Policy Work?
An indexed universal life insurance policy is a type of permanent life insurance that earns interest based on a stock market index, rather than a fixed interest rate.
There are many different types of life insurance policies available. Indexed universal life insurance policies offer a cash value component along with a death benefit payout for the subsidiary of the policy. Unlike regular universal life insurance, which is based on a fixed interest rate, indexed universal life insurance accrues interest based on a market index that is chosen by your insurer, such as the S&P 500 or the Nasdaq Composite.
Under these policies, policyholders can choose to allocate up to 100% of the cash value of the policy in a fund that earns interest at a rate determined by a stock market index. If there’s any remaining portion of the cash value, that goes into a fixed account.
While these funds don’t have a fixed rate of interest, they may guarantee a minimum interest rate. The minimum interest rate is usually between 0 and 1% — lower than what is offered by traditional universal life insurance policies. However, the potential interest rate is greater, depending on how high the stock market index goes.
These policies also typically cap these index rates with an upper limit. The interest rate cap is typically capped at 10 to 12%, reports Investopedia.
Indexed universal life insurance policies have a few other key features beyond their interest rates being tied to a stock market index. These plans have adjustable premium payments, adjustable death benefits, and even access to the cash value of your policy.
These plans function well for those looking for a life insurance option that they can build up over many years, taking advantage of those market-based interest rates.
What Is the Cost of Indexed Universal Life Insurance?
The cost of indexed universal life insurance will vary depending on the insurer, as well as on the age and health of the insured.
There are a number of fees and costs for potential policyholders to pay attention to, which are not always made obvious up front, and can be confusing. Premium expense charges, for instance, are generally deducted from the paid premium before it’s applied to the cash value. There are also administrative expenses, fees and commissions for managing the account, insurance costs like deductions to cover benefits, and a surrender charge in the event that the policy is canceled or withdrawals are made.
While there can be high upfront costs to these policies, they can also offer considerable tax-free gains further down the line.
How Big are the Risks of Indexed Universal Life Insurance?
Tying your life insurance policy to a stock market index may seem like a risky endeavor, but the fact that there is a minimum interest rate protects consumers from losing too much value on their policy if the stock market falls. It also offers room for significant growth, depending on the market.
Moreover, it is essential to note that while indexed universal life insurance policies are related to the stock market, they are not actually invested in the market or in an individual index. (This is different from variable life insurance policies, which do actually invest in stocks and bonds, and thus carry more risk.) Instead, the index is used as a measurement in order to determine the interest crediting rate on that cash value amount.
Another concern with IUL insurance policies is that while the premiums are designed to remain fairly steady, they may increase further down the line if the chosen market index performs at a low rate.
Indexed Universal Life Insurance Lawsuits
Some policyholders with IUL policies may have been misled about their policies into expecting unrealistic rates of return based on the initial sales material they were shown.
Multiple class action lawsuits have been filed against insurance companies over this issue. One was leveled against Life of the Southwest in California, alleging that the company’s IUL offerings violate California consumer fraud statutes.
Another class action lawsuit was filed against Pacific Life on behalf of class members who purchased the Pacific Discovery Xelerator IUL due to similar alleged violations of California consumer fraud statutes.
