What Are the Pros and Cons of an Indexed Universal Life Policy?

An indexed universal life policy is intended to provide increased cash values in policies by tying the value to a stock market index.

What Is Life Insurance?

Life insurance allows individuals to insure their life’s value. Upon an insured person’s death, the value of their life insurance policy is paid out to a beneficiary – usually a family member. These payouts can be used to pay debts of a deceased person, establish a trust fund for children, cover the costs of a funeral and burial, or for many other purposes.

There are different types of life insurance which may work better for different policyholders. Term life insurance lasts for a certain number of years, commonly ranging between 10 and 30. A term life insurance policy will usually end at certain age such as retirement age.

In contrast with term life insurance, whole life insurance covers a policyholder until they die – regardless of how old they are. Under whole life insurance policies, a policyholder’s beneficiary can receive full death benefits even if the policyholder dies at age 100.

What Is an Indexed Universal Life Policy?

Indexed universal life insurance is a type of whole life insurance product which relies on a stock market index such as the S&P 500 or Nasdaq 100. In these policies, all or a portion of the policy’s value is tied to one of these market indexes. If the index performs well, interest is paid monthly on premiums from consumers. If the index doesn’t perform well, no interest or very little is generated.

Although an indexed universal life insurance policy may seem like an investment, the cash value of the policy is not actually invested into the indexes. Instead, they are used as “benchmarks” to determine interest rates.

How Does Indexed Universal Life Insurance Compare to Other Policies?

Like other whole life insurance policies, an indexed universal life policy will cover an insured person until they die. However, the growth of these policies is different. Regular whole life insurance will grow according to a predetermined interest rate – usually between 1% and 4% including. Indexed life insurance policies have the chance to make much higher interests – up to the maximum of between 10% and 12%.

Indexed Universal Life Pros and Cons

There are several pros and cons of an indexed life insurance policy. Balancing these can help you figure out which type of policy is a good fit for you.

The higher potential interest rate is one obvious benefit of an indexed policy. If the policy performs very well, consumers could significantly increase the cash value of their policy above the premiums they paid. These policies also have the feature of a crediting floor up to 1% which protects them from losses due to poor market performance.

There are also tax benefits to an indexed universal life policy. These policies are tax-deferred, meaning that the amount paid into the policy is not taxed until retirement. This means that contributions can be treated as a deduction on yearly taxes. Withdrawals from and loans against a policy are also tax-free in many cases.

Although a well-built indexed universal life policy has many benefits, there is always the potential for disadvantages as well.

The variable interest rate of an indexed life insurance policy is attractive in cases when the market performs well but can be a disadvantage in times of market losses. Although the policy will not lose money, it is possible for the policy to not generate any interest or generate less than a regular policy would depending on the market conditions.

Generally, these policies are associated with higher risks than standard policies. Although variable life insurance policies are still more risky, indexed universal policies are at risk for rising premiums in addition to fluctuating interest.

High fees such as premiums expense charges, administrative expenses, insurance costs, commissions, and fees may be significant. If a policyholder surrenders their policy, it can lead to even more charges such as a surrender charge or a decreased value.

Another downside of indexed universal life is the potential that an insurer will fail to follow through on the marketing promises they made. Some consumers have reported being disappointed by the performance of their policies due to unrealistic representations by insurance companies.

Attorneys are looking into several companies such as Pacific Life, Allianz, Lincoln Financial Group, Minnesota Life, and other for potentially misleading their customers with false promises about policy performance.

Free Indexed Universal Life Policy Deceptive Marketing Class Action Lawsuit Evaluation

If you have purchased an IUL policy, you may be entitled to compensation by joining this Indexed Universal Life Insurance False Marketing lawsuit investigation.

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This article is not legal advice. It is presented
for informational purposes only.