Finance Insurance

The Pros and Cons of Indexed Universal Life Insurance

pros and cons of indexed universal life insurance
Written by Sonny

Insurance companies are constantly striving to create innovative insurance products in order to adequately meet their client’s needs.  Through the evolution of what originated as a simple approach, insurance companies have developed multiple insurance plans that you are able to choose from.  The varying policies available allow you to provide your loved ones with the plan that meets their needs best.

Life insurance acts as a safety net for your loved ones.  It is one of the most significant ways to provide proper coverage in the event that something tragic were to happen to you.  However, finding the most appropriate insurance plan, given the amount available, can at times be overwhelming and a rather difficult process.

A recently developed life insurance product – indexed universal life insurance (IUL) – allows you to use your insurance cash value funds to invest in the stock market.  The indexed universal life insurance policy is not without both its pros and cons, along with the fact that it is one of the most complicated policies available.  Due to the complex nature that surrounds the indexed life insurance plan, it is imperative that you become familiar with all of the options, advantages, and disadvantages of each of the plans.  The following will assist you in understanding indexed life insurance plans.

What Exactly is Indexed Universal Life Insurance?

As mentioned, indexed universal life insurance (IUL) is one of the most complex types of insurance because it’s designed to offer more than one financial solution.  It is a type of universal life policy, in that the premiums remain flexible and the items of the life insurance policy can be changed throughout the contract, such as death benefit, savings option, and premium.  The indexed universal life insurance policy is also a permanent policy, similar to a whole life policy except that it offers more flexibility.  This policy will last your lifetime without expiring such as in the case of term life insurance policies.

Furthermore, the IUL offers a cash component in addition to its insurance component.  This cash feature increases as a result of positive index performance.  You and your financial advisor will select which indexes to invest in each year, for example, the S&P 500.  The indexed universal life insurance policy will build up in cash value, which you will be able to use during the time that you are alive.

How Does the Investment Component Work?

Indexed universal life insurance costs more than a term insurance because it is a permanent policy.  You are likely to pay approximately 5 to 10 times as much each month for the same amount of death benefit.  If you are looking for low-cost life insurance that is the most affordable and you don’t mind that it will need to be renewed, then term life is the better option.  However, if you want permanent coverage and would like to combine your life insurance with an investment component, then indexed universal life insurance would be the better option.

When compared to universal life insurance and whole life insurance policies, indexed universal life insurance costs nearly the same each month.  The predominant difference is how exactly these accounts manage your cash value.

With a whole life insurance policy, you will know exactly how much this account earns due to its guaranteed annual return.   The interest rate for universal life changes depending on the existing market interest rate.  This will fluctuate through the year, but you will earn regardless.

Additionally, indexed universal life insurance will have the most variation when compared to other policies because your return is based on the stock market.  You will receive the most earnings with these policies as long as the market is good, however, if the market has declined, you will not receive any earnings under these policies.


What are the Advantages of Indexed Universal Life Insurance?

Indexed universal life insurance works to your advantage as being a combination of an investment plan along with life insurance.  Since these plans do not lose cash value, like a stock investment they are found to be rather appealing.  This allows you to contribute money to the stock market without the worry of market losses.

Furthermore, you will not have to pay taxes on your investment gains if you withdraw your contributions as a loan.  What does this mean?  You can invest with an indexed universal life insurance policy and never be required to pay taxes on your stocks.

Additionally, tax-free growth accumulates on your investment gains through an indexed universal life policy.  As long as maintain a positive cash value in your life insurance, you will not need to pay taxes on that income earned from the stock market.

Finally, indexed universal life insurance policies provide permanent insurance coverage, therefore your policy will not expire provided that you pay the monthly premiums.


What are the Disadvantages?

A major disadvantage of an IUL is that the policy can be more expensive than other life insurance policies.  Once you figure in costs for insurance coverage, administration fees, and commissions paid to the agent, over two percent of your return will be deducted as fees.

What is the trade-off for not suffering losses on your investment?  Your gains will be capped.  You will lose less when the market is down, but earn more when the market is good.  Finally, you will need to meet the insurance providers’ minimum health standards in order to purchase an indexed universal life insurance policy.  Subsequently, if your health is in poor shape, your policy will be more expensive, if you are able to qualify at all.

A Final Thought

Indexed universal life insurance policies do not have the propensity to earn as much as a traditional brokerage account, which makes them less appealing as a pure investment, but they work best if you are in need of permanent life insurance and you are wanting to invest the cash value into the stock market.  If you do not like risk, cannot fathom losing money, and do not mind a lower total return – indexed universal life insurance is the most feasible and appropriate policy for you.

To be sure, however, take a few minutes and contact an experienced and reputable insurance broker who specializes in variable life insurance products so you can get every questioned answered and make an informed decision about your insurance solutions.

About the author


After spending 25 years in the insurance industry, I reinvented myself into a freelance writer and web designer for the insurance industry. Now I get to talk about insurance instead of having to sell it. I currently write for all types of insurance agents, brokers, and companies.

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