What is Indexed Universal Life Insurance?
Indexed Universal Life Insurance has been around since 1997 but has seen a surge in popularity over the last decade. Years prior, Whole Life had been the primary life insurance vehicle for accumulating some cash value while still paying out a guaranteed death benefit. However, during the 1970's a lot of policyholders decided they could do better by buying less expensive Term Life (for pure death protection) and investing the difference (for income and savings). The Life Insurance Industry responded by developing Universal Life. A very flexible product, fixed Universal Life uses part of premiums to fund pure Term coverage, then pays a sliding % of cash to the savings part of the policy.
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Wanted: More Cash Value, Less Risk
With the rise of the stock market in the dot-com era, people wanted the chance to accrue more cash value in their UL policies by investing in the funds of their choice. Variable Universal Life was developed for this purpose. It offered a combination of death benefit and potential for high returns; however, it also had the same risk of going backwards that the stock market presents.
Following the crash of 2002, Indexed Universal Life saw a growth of 360%. That is because Indexed Universal Life allows policyholders to take advantage of the upside of the stock market while protecting them from downside of the stock market.
The subsequent crash of 2008 and near continual volatility in the stock market since the turn of the century have forged a place for IUL products into the financial industry for what appears to be many years to come. As one researcher put it, "And with (Equity Indexed Universal Life), the most important thing in volatile markets was that this ...return could be achieved by clients without losing some sleep."
The Basics of Indexed Universal Life
Indexed Universal Life Insurance is first of all, life insurance. Upon the death of the insured person, the policy pays a lump sum of cash to the beneficiary. This is what sets life insurance apart from simply investing in the stock market, putting money into CD's, or contributing to one's 401K at work. There is no doubt that many people can save large sums of money, but it takes time. By contrast, a life insurance policy could pay what it can take a lifetime to save, within ONE DAY of taking out the policy, upon death of the insured.
Death Protection Plus Savings
IUL policies offer death protection plus savings, or cash value. The amount of money going to death protection is based on the age and health of the person, and the face amount of the policy. The younger and healthier the person being insured, the less the COI (Cost of Insurance). However, someone buying an Indexed Universal Life policy can choose to put much more into the policy than the COI, because the remainder is invested into funds, and is what creates the cash value. In fact, many people "over-fund" their IUL policies a lot so that they can accumulate tax deferred dollars that can be tapped into when needed.