A Comparison of Indexed Universal Life With More Traditional Policies

In recent times, life insurance purchasers have been putting a lot of stock in policies with guaranteed death benefits, but that doesn't mean there still isn't use and demand for products that offer a bit more variability. One type of policy that's rising in popularity is indexed universal life.

This type of policy ties interest rates to the performance of external indices, like the S&P 500. But risk is minimized by setting a floor (typically zero), under which the interest rates cannot go even if the market sinks. Such a feature is made possible by setting a cap of up to 12% on rate increases.

If this isn't making much sense to you, go here to read more about what indexed universal life is or here to find out how all of this is possible.

How Does Indexed Universal Measure Up to Other Policies?

Let's do some comparisons in order to further discover what makes indexed universal life unique, determine how it stacks up, and decide whether it's right for you. We'll take a quick look at two popular and very traditional types of life insurance – term insurance and whole.

Indexed Universal Versus Whole Life Insurance

• Whole life policies have a fixed death benefit, but indexed universal life features adjustable death benefits, meaning you can add and increase them as needed, though you will have to remain insurable in order to increase.

• With whole life, the guarantee cash value is based on a fixed interest rate, though there are also non-guaranteed dividends which may or may not increase the value, depending on how the insurance company's portfolio performs. The interest rate is usually 3 or 4%.

IUL, on the other hand, increases relative to a an equity index, chosen by you. The policy will have caps and market participation rates, but there is also a floor to ensure you don't go in the negative.

• Whole life policies are characterized by fixed premium payments. IUL is similar to other universal policies in that the premiums are highly flexible. You have to meet a minimum to maintain the coverage, but beyond that, you choose how much you want to contribute, and the excess, after fees, goes to the cash value. You also get a lot of choice concerning the structure of your premiums.

• Generally, whole life is better if you want a guarantee that your cash value will grow in exchange for limiting your upside. If you don't mind taking the risk to obtain maximum cash value growth potential and the possibility of a tax-free income stream, indexed universal life is the way to go.

Indexed Universal Versus Term Life Insurance

• Term life insurance is temporary, usually lasting 10, 15, or 20 years – that means no permanent death benefit; if you're still insurable or purchase the right riders, you may be able to convert it to permanent at a price when the term is up.

Indexed universal life features a permanent death benefit that you can count on even if you pass away well into old age, and you may be able to draw on it for long-term care or retirement purposes.

• Term life policies are generally the cheapest on the market and are a lot more affordable. This makes them a good purchase for young families that aren't making much money yet but have an urgent need of coverage, due to young dependents.

IUL costs more, but it's a cost-effective way to safely maximize your death benefit with little downside. It's also important to remember that the extra cost is securing a lifelong death benefit rather than temporary coverage.

• Since term has no cash value, you can't draw on the policy in any way while you're still alive. Indexed universal does have a cash value, and you can take out withdrawals or borrow against it in times of need.

What is the Best Policy for You?

That really depends on your circumstances, as well as personal and financial needs. You can get more information on indexed universal life here. Click here to contact licensed agents qualified to give you personalized answers.