Index Universal Life (IUL) is a type of Universal Life insurance policy that, like whole life, provides lifetime coverage and builds cash value you can borrow against or reinvest if you keep up with your premium payments. And like other flexible Universal Life policies such as Variable Universal Life Insurance, it allows you to adjust your premiums and your death benefits to fit your needs.
How Index Universal Life Insurance Works
What sets Index Universal from Variable Universal is how its cash value is invested.
Unlike Variable Universal, Index Life Insurance is tied to a stock market index such as the S&P 500. Your cash value grows along with the stock market but you’re protected against losses because it also relies on steady earned interest. Variable Universal Life Insurance has no safety net.
Just like Variable Universal, a portion of your premium goes to your insurance policy and the insurance company places the remainder in an index account. Its added fees, expense charges and administrative expenses make it more expensive than whole life.
You can borrow against your cash value, reinvest it, use it to pay your premiums, or withdraw it. If you borrow against it, the insurance company charges interest. And you must pay it back in full including the interest or what you owe will cut into your death benefit. If you withdraw it, the IRS views it as regular income.
Index Universal Life Insurance Pros and Cons
Obviously, the biggest advantage to having any life insurance policy is the ability to provide lifetime coverage for your family. But like anything in life, Index Universal Life Insurance has its pros and its cons.
Pro: It can build wealth quickly.
Con: It’s riskier than other types of permanent life insurance (although less risky than Variable Universal).
Pro: It provides greater flexibility allowing you to build coverage that fits your financial needs and goals.
Con: There are more fees, charges and expenses to pay.
Pro: Cash value relies on earned interest as well as stock performance.
Con: Some life insurance companies place a cap on returns.
Pro: It won’t decrease your Social Security benefits.
Con: The premiums are higher for older policyholders.
An Index Universal policy is probably a good fit for a moderate risk taker. The financial benefits can be much higher than any death benefit alone.