Throughout the years, the life insurance industry has come out with numerous new products to keep up with the growing demand of consumers’ ongoing needs. Universal life insurance came about in the late 1970s. This was during a time of high inflation, and a correspondingly high-interest rate environment. The product essentially helped people to “buy term and invest the difference” all in one component.
Over time, universal life insurance has gone through many changes, arriving at its current version in the mid-1990s where it provides a nice blend of life insurance protection, along with the potential for investment growth.
Today, however, a newer version of universal life insurance has entered into the marketplace. This is indexed universal life – or IUL. With this product, consumers still have a tax free death benefit and tax-deferred growth of cash value. However, the funds that are within that cash value are credited in a different manner than those that are in whole life or variable life insurance, as well as those that are in regular universal life insurance products.
How Indexed Universal Life Insurance Works
Indexed universal life insurance is very similar to regular universal life insurance. However, it offers its policyholders the ability to allocate their funds to different “segments” that represent underlying market indexes. (There is typically at least one fixed segment in each IUP policy, too).
Overall, indexed universal life insurance combines life insurance protection with more accumulation potential in its cash value component. These policies offer essentially the same features as regular universal life insurance, such as premium flexibility. Yet, they also provide more growth potential – with less risk than variable universal life insurance products.
The policy’s cash value earns interest based in part on the upward movement of an underlying stock market index (or, in some cases, more than one index). It is important to note, however, that the policy holder’s cash is not invested directly into the stock market.
These policies also offer a guaranteed minimum rate of interest. So, the policyholder actually will earn a minimum, or a “floor” below which his or her interest rate will not fall. This can provide them with protection of principal during market downturns.
In the crediting of interest, the index movement is measured over a specific index term. Then, the annual percentage change – if any – is calculated. The annual percentage change in the index is adjusted by the interest rate cap, participation rate, and/or annual spread.
The resulting interest rate is then credited to the contract values. If, however, the underlying market had a down year, and the interest calculation is negative, the interest rate that is credited to the account will be zero. This means that although the account holder will not earn anything for the period, he or she will also not lose anything either. This can be a positive thing given that others who are invested in the market may have lost substantial amounts of money.
The most common factors that determine and set limits on the amount of interest that is credited are the participation rate, cap rate, and spreads and asset fees. Also, a segment is also created when excess money – after premiums and policy charges are taken out – is directed to a crediting strategy.
Each segment has a cap rate, which is an “upper limit,” or a maximum on an index-linked interest rate. These rates are typically reset at the beginning of each interest crediting period. A minimum cap rate may be guaranteed – and these may also vary from state to state.
Each segment also includes a specified participation rate that determines the percentage of the change in the index that is used in calculating interest earnings. Individual segments may have different participation rates, and these can change annually.
The index spread is the difference between what an index earns and what the account is credited. Indexed interest for certain types of indexed annuities is determined by subtracting an insurance company’s declared percentage from any gain that the index achieves in a specified period. For example, if the spread is 4 percent and an index increases by 10 percent, then the contract is credited with 6 percent indexed interest.
As an example of how interest may be credited to an indexed universal life insurance account, and then, as a policyholder pays the premium, the insurance company will calculate one year of fees and policy charges. The insurer will then place those funds into the basic interest strategy to hold the premiums for funding one year of policy charges and the cost of insurance.
Next, the remaining amount of premium will be allocated into segments. A segment term is typically one, five, or six years long – depending on the strategy that is selected by the policyholder. Funds cannot be redirected into different strategies until the segment term matures.
Last, the segment term ends, and the segment dollars are then placed back into the basic interest strategy. The process begins again with funds kept in the basic interest strategy to pay for the policy. Excess funds are allocated to new segments with new segment terms.
Just some of the many advantages that can be found in an indexed universal life insurance policy include the following:
- Tax-free death benefit
- Protection of principal
- High percentage of cash value accumulation
- Tax-deferred growth of cash value
- Funds can be received tax-free in retirement
- Annual resetting of gains
- No minimum age requirement
- Policyholders may receive their money at any age
- No mandatory Required Minimum Distribution Requirements
- Money may be protected from lawsuits and creditors
- Funds may pass around probate
How to Find the Best Life Insurance Premium Quotes
When shopping for any life insurance coverage, it is always best to compare policies, insurers, and premium rates before making your final purchase. That way, you can decide which plan is truly the best one for you and your specific needs. If you’re ready to protect those that you care about with life insurance protection, we can help. We work with many of the best life insurance carriers in the marketplace today – and we can assist you in obtaining all if the important information that you need to make the right choice.
At InsureNow 365 we can get you the details that you need quickly and easily – right from your computer, without ever needing to meet with a life insurance agent. When you are ready to start comparing policies and premium quotes, all you need to do is fill out the form on this page.
Should you have any questions throughout the process, please feel free to contact us. We can help to walk you through step by step life insurance policy comparisons, as well as premium quotes. You can contact us directly, toll-free, by calling 888-229-7522.
We understand that purchasing life insurance can be a big decision – and we want to be sure that you have all of the information that you need to make the right choice. Contact us today – we are here to help.