In the third and final part of my series I am going to be talking about Indexed Universal Life, a similar type of Universal Life Insurance, that deserves a dedicated post because:
- The investment returns are based on the performance of the stock market rather than interest rates or carrier performance.
- Indexed Universal life (IUL) is one of my favorite types of permanent coverage to use for a variety of reasons.
Indexed Universal Life (IUL) functions the same way as Universal life does. It provides a flexible death benefit, premium and accumulates cash value.
The main difference is the return of IUL is based on a particular index in the stock market (e.g. the S&P 500).
These returns on the indexes are subject to caps and floors. Meaning that:
- There will be a cap on the gains you can get in a given year
- There is a floor on the amount you can lose due to a poor market return
You have $1,000 of value in a IUL policy. You are allocated to a S&P 500 index that has a cap of 9% and a floor of 0%.
The stock market has a great year and returns 12%. That year the policy would credit your account a 9% return, meaning the value is now $1,090.
The second year rolls around, the market crashes and it drops 10%. Since you have a floor of 0%, your loss to principal is 0, meaning your account value is still $1,090.
The greatest benefit of a IUL is that you can participate in the market without having any of the downside risk of a market crash.
See the video below from one of our insurance carriers that does a great job of visually representing how an Index Universal Life Policy works.
For the reasons above, Universal life typically end up being one of my favorite products to recommend. As older clients can still participate in the market without any of the downside risk. Younger clients can have an additional avenue in investing in stocks while being able to eliminate some of their market risk.