What is an Index?
An index or indicator is like a marker of a certain subset of the stock market which makes it easier to watch how one set of stocks performs relative to others.
Indexes consist of companies from automotive, oil and gas, apparel, textiles and other sectors.
How is an index related to life insurance policies?
IUL insurance or “indexed universal life insurance” is a product of indexed insurance and is a finance tool. An IUL policy gives premium into holdings whose profits are associated with the outcome of indicators of the stock exchange market. Indexed universal life insurance policies provide flexibility of adjustable premiums and face value, an opportunity to increase face value without the risk of investing in equities market. These policies are not meant for everyone.
What is Universal life insurance and indexed universal life insurance?
Universal life insurance (UL) come in different forms which include fixed rate models to variable ones, where you select equity accounts in which to invest. Cash value amounts can be allocated to a fixed account or an equity index account through Indexed universal life (IUL). Policies offer indexes like Nasdaq 100 or S&P 500. As no money is actually invested in equity positions, IUL are more volatile but less risky than ULs. While maintaining a death benefit, IUL policies offer tax deferred cash accumulation for retirement. People might use IULs as key person insurance for business owners, estate planning vehicles or plans of premium financing when they may need permanent life insurance protection and also want to take advantage of possible cash accumulation via equity index.
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How does Universal Life Work?
According to the life of the insured, a portion pays for yearly renewable insurance, when a premium has been paid. Fees are paid and the rest is added to cash. Fixed rates of interest and a range of indicators are offered by IULs to the customers. The total amount of cash is added with the interest accordingly to the increase in an equity indicator. The amount which is given to indexed and fixed income is decisive for the policyholders. The amount of index is known to start at the beginning of every calendar month and contrasted to an amount at the end of every calendar month. Interest is added to the cash in this policy as soon as in a month an indicator is increased. Monthly or annually, index gains are credited back to the policy. All the average of the daily profits for a monthly time are utilized by other policies. No interest amount at all is added to the tax amount if the performance of the indicator is not good. According to the participation amount, the profits from the index are added. Insurance company sets the rate which can be from 25% to more than 100%. The IUL policies add the indicator interest amount to the cash money amount every 5 years or every year.
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Pros of IUL Policy
- The policy holder bears the risk. Therefore, all the premiums are lower for this particular policy and the price of the policy is lower compared to others.
- Amounts credited to cash value grow tax deferred. The policyholder can stop making odd premium payments as the cash can pay the insurance premiums.
- The amount risked in indexed vs. fixed amounts is controlled by the policyholder. The death benefit amounts can be adjusted. This makes the policy flexible.
- Permanent death benefit
- Not directly invested in the market which makes it less risky.
Cons of IUL policy
- As the insurance companies set a max involvement rate to less than a hundred percent it sets caps on accumulating percentage.
- The policy is more suitable for big values as the lesser amount does not offer an advantage over other regular policies.
- No interest is added to the cash amount if the performance of the indicator is not good as the policy is based on equity index. Market indexes are used as a standard for performance by investment vehicles.
Deciding on which policy to invest in is an important decision. IUL policies are excellent for those who want to earn interest and also need security.
Author Bio: Joel Zimmerman is an experienced financial advisor and his areas of specialization include retirement planning and risk management. When Joel is not working with clients, he is busy creating informative blogs and whitepapers.