The life insurance markets can be pretty daunting for the uninitiated – almost like you have to learn an entire new vocabulary just to know what you're shopping for. Then, just as you come across a type of coverage that best fits your goals and financial situation, you realize a whole range of other options branch out from there. On this site, we focus on a very specific type of insurance called Indexed Universal Life, which, as the name suggests, is a type of universal life policy. IUL may be an attractive purchase for more sophisticated buyers who want more control and flexibility with their policy – yet without a lot of the downside.
Intrigued? Before we get into describing exactly what indexed universal life is and who it's for, let's start at the top.
Universal life is a permanent life insurance policy, which means that your premium payments go towards building a cash value that lasts for your entire life – as opposed to term policies, which cover you for 10 or 20 years but leave you with no long-term financial protection.
Permanent policies are expensive because they're designed to not only build cash value but last for the long run; the higher risk of dying in old age is spread out over the life of the policy, allowing you to make a level payment as long as you are insured. Keeping the payment level, however, means it is quite considerable from the start.
Unfortunately, permanent policies are often just out of reach for young families with breadwinners just starting in their careers. These young families are also at the greatest need for insurance because their dependents are the most vulnerable if disaster strikes.
Term policies are a great alternative, but for many, it's not enough. Universal life insurance comes in and helps solve that problem by creating additional flexibility. You get the level payments and cash value of a permanent policy, but you can decide how much you want to pay on your premiums after a minimum amount to maintain coverage is met.
Additional payment helps grow the cash value by accumulating interest, but if you're having a tight month, you can cut back and wait for brighter times.
Variable universal life is another type of of policy that gives you an opportunity to allocate your cash value into accounts that behave like mutual funds and invest in stocks or bonds. It's more risky, but you get a unique opportunity to grow your money.
Of course, when you make your own investment decisions, you take on a greater risk of your policy lapsing should your choices fail to perform as desired. On the bright side, if you know what you're doing and choose wisely, you stand to gain a greater return on your policy.
In order to minimize the downside, many insurance companies give a guaranteed death benefit, which goes to a specific age and can be maintained as long as you pay your minimums.
Expanding on the concept of more control associated with variable universal life, indexed universal links to the movement of an index, such as the Russell 2000, the Dow Jones, the S&P 500, or the Nasdaq 100. They also have the option to put it in a fixed interest account if they do not want to mess with an indexed equity account.
But there are some other vital distinctions as well that many people find extremely interesting as well. One of the most important is the idea of principal protection. Your money isn't actually invested in the stock market or whatever other indices you choose; rather, the insurance company invests their own money and then credits your account with interest accordingly.
The downside to this is you will almost always have caps on just how much you can earn, no matter how much the market goes up, but the huge upside is that it doesn't affect your account negatively if the market goes down. Rather, you just don't earn anything.
As you can imagine, there is a lot more to it than that. Click here to check out some of our other articles and learn more about the ins and outs of indexed universal life.