A life insurance policy offers financial protection for loved ones if the unexpected happens. Yet, certain types of life insurance policies are more complex and also seek to offer a means of saving and investing money.

A whole life insurance policy is simple in that it can accrue cash value at a guaranteed rate of return, but a policy like indexed universal life insurance (IUL) takes the cash value account in a different direction, letting policyholders invest the money in the stock market.

Here’s what you need to know about IUL policies, how they work, and alternatives to consider.

What is indexed universal life insurance?

Indexed universal life insurance is a type of permanent life insurance policy that has a death benefit and a cash value component. But unlike the guaranteed rate of return of whole life insurance, the cash value of an indexed universal life insurance policy is based on the performance of the stock market.

An IUL offers the same flexibility as universal life insurance, and at the same time, lets the insured experience the upsides of stock market investments with minimal risks. But since the stock market directly affects the cash value, an indexed universal life insurance policy is more complex and volatile than other types of life insurance coverage.

How does indexed universal life insurance work?

Indexed universal life insurance is a kind of permanent life insurance coverage that has a tax-deferred cash value and coverage that lasts your entire life as long as the premiums are paid. The cash value growth of regular universal life insurance depends on the market interest rates. But the cash value of an IUL is tied to a stock index.

The available indices vary across insurers, and some policies may let you choose more than one. The most commonly used indices are NASDAQ 100, S&P 500, and Russell 2000.

Like any universal life insurance coverage, an IUL policy offers flexibility, with the choice to adjust premiums and death benefits as required.

What are the benefits of an IUL policy?

Although indexed universal life insurance is complex, it also offers a number of benefits, such as:

• Flexibility: Indexed universal life insurance gives you control over your premiums and death benefit. You can change the coverage amount and adjust the death benefit as and when needed. Some policies may require you to undergo a medical exam before you can increase your death benefit.
• Higher return potential: Since an IUL policy depends on the stock market performance, the gains can potentially be higher than other life insurance products. The Index Floor Rate protects the original cash value from losses when the stock market isn’t performing as well.
• Tax-deferred gains: The cash value of an indexed universal life insurance policy has tax-deferred growth, while the death benefit is tax-free for the beneficiaries. Withdrawals and, in many cases, loans taken against the policy are also non-taxable if certain requirements are met.
• Death benefit: An IUL policy provides beneficiaries with a tax-free death benefit. This money can be used as the beneficiary chooses, from paying for funeral expenses to settling debt.

What should you consider before getting indexed universal life insurance?

Indexed universal life insurance has its benefits but make sure you also consider the following potential drawbacks.

• No guaranteed return: An IUL policy does not guarantee the rate of return. Depending on the market performance, your gains could be higher than a traditional UL policy, but they may also be much lower than other policies and some carry a risk of losing value. Besides, the premiums on certain policies can rise if the index performs poorly in a bear market.
• Restricted gains: The cash value growth of an IUL policy is restricted by the insurer in a bull market. Regardless of how the index performs, your gains are limited. The insurer also retains a part of the gains, specifically anything above the cap.
• Significant cost: An IUL policy comes with several fees, including premium expense charges, commissions, administrative expenses, and surrender charges. The cost of the premium varies from one insurer to another and is affected by the policyholder’s health and age.
• Taxes: If an IUL policy is surrendered or lapsed, you may have to pay taxes on any money taken from the policy prior. A tax professional can help you understand the full tax implications of an indexed universal life insurance policy.

Does an IUL policy make sense for you?

An indexed universal life insurance policy can be expensive, thanks to fees and higher premiums. Because of the higher cost and complexity of an IUL policy, they’re not the right choice for everyone. It’s best to consult with a financial professional to understand the intricacies of the policy before applying.

Alternatives to IUL

Indexed universal life insurance has advantages, but it might not be the right fit for everyone. If you’re a novice investor with no experience in the stock market or if you want a policy that offers more stability and peace of mind, you might want to consider the following options.

Indexed universal life vs. permanent life insurance

Permanent life insurance coverage lasts a lifetime and does not expire as long as the premiums are paid. Not only does the policy generate cash value, but the premiums also remain level.

Fidelity Life offers RAPIDecision® Senior Whole Life insurance for those between 50 and 85 who want to secure lifetime coverage. For most individuals, a medical exam isn’t required.

Indexed universal life vs. term life insurance

For people looking for affordable life insurance for a set period, Fidelity Life offers flexible and budget-friendly term life insurance coverage. Customers can choose from a term length of 10, 15, 20, or 30 years with a guaranteed death benefit payout and level premiums. Unlike whole life or universal life insurance, term life insurance does not build cash value.

Let Fidelity Life help you find the right life insurance policy

Life insurance is intended to provide financial security and peace of mind, but with so many available options with varying features and complexities, the choice can be difficult and confusing.

While Fidelity Life doesn’t offer indexed universal life insurance, we have many other types of life insurance to choose from. Our team of licensed insurance agents is here to help make decisions easier by walking you through the different options to find the right fit. You can also get a free life insurance quote online.

FAQs about IUL

Can you lose money with an indexed universal life insurance plan?

Indexed universal life insurance is an investment that is tied to the stock market. Since there is no guaranteed rate of return, your cash value could decrease based on the performance of the index. However, most policies have a guarantee that applies to the principal that helps protect against financial losses. On the downside, insurers usually cap the maximum amount you can gain.

Is indexed universal life insurance a good investment?

Indexed universal life insurance may not be the right investment option for many people, since it does not have a guaranteed rate of return, involves larger fees and costs, and comes with the risks of a stock market downturn. If you’re considering an IUL policy, consulting a financial professional or licensed insurance agent could provide you with valuable insights into this investment strategy.

When can you withdraw money from an IUL?

While there are no minimum age requirements for withdrawing money from an IUL, you can only take out the amount that you have paid into the policy as premiums, or there are tax consequences. Always consult with a financial or tax professional before withdrawing money from any life insurance policy.