Understanding Indexed Universal Life Insurance

Do you have life insurance? If the answer is no, you should seriously consider the different options available.

Life insurance is an expense you should make room for in your budget. Even though we plan to live as long as possible, situations happen in which that plan no longer works. In the case of your unexpected death, having a life insurance policy protects your loved ones from any financial burden that could come. If you don’t have a policy, you could end up leaving your family with a heft funeral bill and any unpaid debt.

So are you ready to look at life insurance? There is one policy we want to focus on, and that is indexed universal life insurance

What an Indexed Universal Life Insurance (IUL) Policy Is

An IUL policy falls under a universal life insurance plan, which is a type of flexible permanent life insurance. Universal policies combine features from both term life insurance and permanent life insurance. The universal part of the policy means you have the flexibility from term policies with the savings-like element (cash value) of the permanent insurance.

With a universal policy, you are allowed to adjust the frequency of payments and your premium payments altogether. It also allows you to change the death benefit. The cash value portion of the policy comes from your monthly premium payments. A part of each payment goes towards the cash value which can be accessed by the policyholder.

It is the cash value in which an IUL policy differs. Your policy will earn interest which grows your premiums and in the result, increase the cash value. This interest is acquired in either an indexed account or a fixed account, both which guarantee a minimum level of interest (floor).

How the Interest Works

To understand how the interest on an IUL policy works, you must understand what index means in this context. An index represents a basket or collection of individual stocks (Standard and Poor’s 500 (S&P 500) and the Dow Jones are two typical examples of an index). One index will represent multiple companies, sometimes hundreds like the S&P 500 index, within the stock market.

The cash value’s interest is based on the rate of a specified index, not a fixed rate. No money is actually invested in the stock market which makes an IUL policy less volatile than others.

Your gains on the cash value are subject to the performance of the index and credited to the policy, taking into account the participation rate and cap. The rate is what is set by your insurance company and dictates how much your cash value participates. The cap means the maximum amount of gains you cash value can earn.

Is It For You?

Just like with every other policy available, an IUL is not for everyone. But if it is something of interest, an IUL has the potential of earning a significant amount of interest that can be beneficial for you down the road. An IUL also has the benefits of being a secure insurance policy while still earning interest within the market.

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