Indexed universal life is a type of permanent life insurance with cash value that can fluctuate based on the performance of a market index like the S&P 500.
Indexed universal life insurance provides lifelong coverage along with cash value that can rise and fall based on the performance of a popular market index like the S&P 500. Policies typically try to limit your losses by providing a minimum crediting rate of 0% along with caps on how much you can gain. (These aspects may be regularly changed by the company.)
In addition to providing a death benefit, permanent life insurance like IUL can build cash value over time. You can take advantage of this while you're living by surrendering your policy or borrowing against its cash value—but the loan needs to be repaid.
IUL policies track an equity index such as the S&P 500. But all indices are unmanaged and can't be directly invested in. The crediting rate for the index account will reflect the performance of the related index over a time period like one year—with upper and lower limits set by the company.
IUL provides flexible premiums (which are also available with other types of universal life insurance). This flexibility allows you to pay more or less for your policy from year to year, within certain limits.
IUL protects you for your entire life. You'll have the peace of mind that your loved ones will get a guaranteed death benefit when you're no longer here.1 And they will typically get that money tax-free.
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Questions about IUL? We've got answers.
Indexed Universal Life (IUL), Universal Life (UL) and Variable Universal Life (VUL) are all types of universal life insurance—a type of permanent life insurance that offers flexibility in premium payments and death benefit. But these policies differ in how the cash value component grows.
With UL policies, the cash value grows based on a fixed interest rate set by the insurer. With IUL policies, the cash value growth is linked to the performance of a stock market index such as the S&P 500. You could get returns up to the company's cap rate and may have some protection against market losses. However, in many cases, the caps on gains in IUL policies can be lower than what's shown at the time you purchase a policy. So it's worth asking whether the caps are guaranteed or they could decline.
VUL policies provide the most investment flexibility, allowing you to allocate the cash value into various subaccounts that function like mutual funds. While VUL offers the potential for market-like gains, it also has a higher risk of loss due to market volatility.
The growth of an IUL policy is typically linked to one or more stock market indices. These might be the S&P 500, Nasdaq 100 or the Dow Jones Industrial Average. Some policies may also offer options linked to international indices or other financial benchmarks. The performance of these indices determines the interest credited to the policy's cash value and may be subject to a cap and floor set by the insurance company. This means there is a maximum limit to your gains and a minimum guaranteed interest rate—often set at 0%—which protects against market losses. But that doesn't mean your policy can't lose value. Policy values could still go down after expenses and fees are deducted.
The concept of cash value growth that's linked to a market index seems pretty simple. But the reality is far more complex. The portion of your premium that funds your cash value isn't invested in an index fund. To reach the guaranteed floor rate that companies offer, a portion of your premium is put into the company's general account. Then whatever remains is used to purchase derivates on the options market. These complex investments are linked to the index performance. So, the policy value dollars are not directly invested in the index or even a fund that directly tracks the index. (If you're interested in a more direct connection, a variable universal life policy may be a good fit for you. Its cash value is directly invested in the underlying funds. Or you might consider another type of universal life in which the cash value is directly invested in the insurance company's general account.)
Yes, you can cash out or borrow from an IUL policy. The cash value accumulated in IUL can be accessed through withdrawals or policy loans. Note that loans or withdrawals could lead to a temporary or permanent reduction in your death benefit. There may also be tax consequences if not managed properly.
These policies do not pay dividends. Instead, they are typically credited interest based on the performance of selected market indices and within the floors and ceilings specified by your policy.
Yes, similar to other permanent life insurance policies, the cash value is an important aspect to an IUL policy. It grows based on the performance of specified stock market indices, subject to caps and floors set by the insurer. This means that while the cash value can increase with positive index performance, it is protected from negative returns due to market downturns but may still decline because of policy charges. The cash value can be accessed through withdrawals or loans, providing policyholders with financial flexibility. Just keep in mind that accessing the cash value could reduce your death benefit or increase your policy's costs.
Converting an IUL policy to a different type of life insurance may be possible, but it depends on the terms and conditions set by the insurance company. In particular, you might be able to exchange the policy with a different company after an analysis of your health history called "underwriting." If you're thinking about converting your policy, it may be a good idea to speak with your financial advisor.
At Northwestern Mutual we have a robust suite of life insurance products, including universal life insurance and variable universal life insurance in addition to whole life insurance. IUL typically looks great when an advisor recommends it, but it doesn't always perform as well over time. We have several flexible products and have found that they meet our clients' unique needs. Our focus is on delivering great results rather than trying to convince you that we might. So, we don't offer indexed universal life. We'd love to get to know you and help you find the right financial tool for your situation.
