Term Life Insurance & Permanent Life Insurance

Indexed Universal Life Insurance (IUL) is a type of permanent insurance that combines lifetime protection with a cash value accumulation feature that can grow based on the performance of a stock market index, like the S&P 500. This allows policyholders to potentially grow their cash value at a higher rate than with traditional whole life insurance policies, while still providing the security of a death benefit for beneficiaries. 

IUL insurance or Indexed life insurance offers flexibility in terms of both premiums and death benefits, and the cash value can be used to help pay premiums or grow over time. While IUL insurance has more complexity than term life insurance or traditional whole life insurance, it offers the potential for greater returns and customization. 

How Indexed Universal Life Insurance Works: 

 Premiums:

1. Like other permanent life insurance policies, IULs require ongoing premium payments. These premiums are typically higher than those of term life insurance but provide lifelong coverage. IULs offer flexible premiums, meaning you can adjust the amount of premium payments or even skip payments if your policy’s cash value is large enough to cover the cost of the insurance. 

1. Death Benefit:
   The IUL policy includes a death benefit, which is paid to the beneficiary when the policyholder passes away. The death benefit can typically be adjusted during the policyholder’s life, giving flexibility to either increase or decrease coverage based on life changes (such as marriage, children, or changes in financial needs). 

1. Cash Value Growth:
   The key feature of an IUL is the cash value, which grows based on the performance of a specific market index. This means that your cash value can earn interest depending on the market’s performance, without directly investing in stocks. 

1. Cap and Floor: The growth of the cash value is subject to a cap (maximum interest rate) and a floor (minimum interest rate). This structure ensures that even if the market performs poorly, your cash value won’t lose money (the floor is typically 0% or a small negative rate). 

1. The index most commonly used in IULs is the S&P 500, but other indices may be available, depending on the policy. The policyholder’s cash value is linked to the performance of the chosen index, but it does not directly participate in market risks (i.e., you don’t actually invest in the stock market). 

1. Interest Crediting:
   Each year, the insurer calculates the growth of the cash value based on the selected index’s performance over a specific period. The interest credited to your cash value is based on the index’s performance, subject to a cap (a maximum return) and a floor (a minimum return), ensuring that the policyholder’s cash value won’t decrease. 

1. Policy Loans and Withdrawals:
   As the cash value grows over time, you can borrow against it through loans or take partial withdrawals. Loans and withdrawals generally don’t trigger taxes as long as the policy remains in force, but the loan interest and any unpaid balances will reduce the death benefit. 

1. Flexible Death Benefit Options:
   IULs often provide two death benefit options: 

                    Option A (Level Death Benefit) 

                    Option B (Increasing Death Benefit) 

 Key Features of Indexed Universal Life Insurance: 

 Flexible Premiums:

1. Unlike whole life insurance, which has fixed premiums, IULs offer flexibility in premium payments. This allows you to adjust how much you pay based on your financial situation or future needs. For example, you can increase or decrease premium payments or use the accumulated cash value to cover premium costs if necessary. 

1. Potential for Higher Cash Value Growth:
   The ability to link the policy’s cash value growth to a stock market index allows for the potential for higher returns than with traditional whole life insurance, where cash value grows at a guaranteed rate set by the insurance company. However, the growth is subject to caps and floors, meaning the policyholder’s returns are limited in both good and bad market years. 

1. Tax-Deferred Growth:
   The cash value in an IUL grows on a tax-deferred basis, meaning you don’t pay taxes on the growth of the cash value until you withdraw it. This tax-deferred benefit allows your money to grow more efficiently over time. 

1. No Direct Stock Market Exposure:
   Although the growth of your cash value is linked to a market index, your policy does not directly invest in the stock market. This means there’s no risk of losing money due to market downturns—your cash value is protected by a floor, typically 0%, which guarantees that your cash value won’t decrease in a poor market year. 

1. Flexible Death Benefit:
   You can adjust your death benefit during the life of the policy. Whether you need more coverage during your working years or less as you approach retirement, an IUL offers flexible death benefit options to meet your changing needs. 

Loan Options:
IUL policies allow you to take loans against the accumulated cash value at low interest rates. These loans are not subject to income tax and can provide a source of liquidity if needed. However, unpaid loans and interest can reduce the death benefit if not repaid.