Understanding Indexed Universal Life (IUL) Insurance

Indexed Universal Life (IUL) Insurance is becoming an increasingly popular choice for many people. It’s attractive for those who need permanent life protection but also want to build policy cash value for uses such as college funding, retirement income, starting a business, or emergencies.

What’s unique about IUL is how the cash value builds within the policy. IUL credits interest up to a cap (maximum interest rate) based on the performance of an external market index such as the S&P 500^® Index (excluding dividends), while also offering the downside protection of a “floor” (minimum interest rate).

As Ray Caucci wrote recently in his post on choosing the right insurance policy, IUL can be attractive to those who have a moderate tolerance for risk.

Assuming that you and your financial professional determine that an IUL policy is right for you, there are several things you’ll want to consider when choosing an IUL policy.

Be aware of the “moving parts” in your policy. Many companies reserve the right to change policy floors, caps, participation rates and persistency bonuses at any time. There are policies that guarantee some of these parts which provide added guarantees to the customer.

The “floor” of your policy is important. The floor is the minimum guaranteed return for the interest credited to the cash value, and most IUL policies have a zero percent floor that ensures your policy cannot lose value due to index performance (the cash value can go down due to insurance charges). There are also IUL policies available that have a one or two percent floor. This means you’re guaranteed to get some credited interest regardless of how the index performs.

The “cap” is also important. IUL policies offer strong upside accumulation potential, based on the performance of an index from one point in time to another (crediting period). However, in exchange for the guaranteed downside protection against market losses, IUL policies cap the upside opportunity. For example, if the policy cap is 10 percent and the index goes up 20 percent during the crediting period, the policy would be credited 10 percent.

Understand the “indexed choices” and “crediting periods.” IUL policies offer different indexed account options. Some policies offer one and others may provide a choice of options. The most commonly used index is the S&P 500 that is based on a broad range of industries in the US. Another consideration is the credit period, which is timeframe to review the beginning and ending performance of the index. Some policies offer monthly, annual or even as long as a five year crediting period. The most commonly used crediting period is annual point to point.

Understand the other features of your policy. In addition to the floors, caps, index choices and crediting periods, there are other features such as participation rates and persistency bonuses that might play in your decision.

All indexed accounts have a participation rate. The most common one is a straight 100 percent, so if the index goes up five percent, you get 100 percent of that five percent (up to the cap). Some accounts, called high participation accounts, offer participation rates above 100 percent. For example, if the index went up five percent, a high participation account with a 140 percent participation rate would credit the account seven percent (up to the cap), because the account gets 140 percent of whatever the index did. High participation accounts may help stabilize the policy’s interest earnings over time. However, they typically offer lower cap rates.

Some companies offer persistency bonuses that are paid after the policy has been in force for a certain period of time, often 10 years. In some cases these bonuses are guaranteed and in other cases they may be changed at the discretion of the company.

Individuals who have a need for death benefit protection and a desire for cash value accumulation may want to learn more about indexed universal life. An IUL product that has a simple design and policyholder-friendly features such as attractive caps, multiple indexed account options, a floor that protects against loss due to index performance and a loyalty bonus can suit a broad range of needs and goals. For information about indexed universal life insurance and to better understand how this type of policy fits into a well rounded financial plan, please contact a Penn Mutual Financial Professional or visit our website.

*Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. All guarantees are based on the claims paying ability of the issuer.

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.
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