Indexed universal life insurance provides death benefit protection and offers the opportunity to raise cash value. This cash value builds over time through an account that follows the movements and fluctuations of the stock market indexes. Understanding the benefits and risks of this life insurance option can help you make a more educated decision for you and your family.
Advantages of Indexed Universal Life Insurance
Indexed universal life insurance offers stability and flexibility. Unlike other permanent insurance options, universal life insurance can provide flexible premium rates, which can vary year-to-year and can sometimes even be skipped. Depending on which insurance company you choose, you may be able to borrow from the cash value attached to your policy, providing you with even more flexibility. If you can, your withdrawn cash value will be tax free up to the amount of premiums you have paid, but your insurance company likely will charge you interest on your borrowed cash value.
Insurance as an Investment
Indexed universal life can be used as both protection for your family and as an investment. Unlike whole life insurance, which has relatively low returns, indexed universal life insurance has the potential for greater gains due to investing in the stock market. As you pay your premiums, a portion of that money is added to your cash value, which grows tax deferred. Indexed universal life insurance also has a guaranteed "floor" protection at around zero percent, which means that even if the market index crashes or there is extreme volatility in the market, your cash value will not earn less than zero percent.
Disadvantages of Indexed Universal Life Insurance
Indexed universal life insurance offers higher fees than an investment account, but with less investment options. These higher fees can often overshadow any savings from being a tax-deferred investment. Surrender penalties prevent the insured from withdrawing from their accounts within the first seven, or more, years of ownership. Indexed universal life insurance, like other permanent life insurance options, also is priced more highly than term life insurance.
Although a portion of your premiums go toward your cash value, very little of your money goes toward cash value in the first few years after your initial purchase. Even though there is a zero percent floor to prevent losses, there is also a ceiling that prevents you from benefiting beyond a certain percent from market booms. For instance, if the index spikes at 20 percent, you may only receive 12 percent from your insurance provider. Also, the guaranteed returns can be relatively low, depending on the insurance provider.