Indexed Universal Life Insurance: Is It a Good Fit?

Looking to capture stock market gains while avoiding unnecessary risk? You may want to consider indexed universal life insurance.

Indexed universal life insurance is a form of permanent life insurance, which simply means the death benefit never expires.

The most basic types of permanent life insurance include a “cash value” account backed by the insurer’s bond portfolio. The insurer takes your premium payments, deducts certain expenses and deposits the rest into the cash-value account, where the money earns tax-deferred interest.

You can borrow from the cash-value account and even withdraw some money tax-free.

Indexed universal life insurance is similar, but it uses a stock-market index such as the S&P 500 Index to determine the interest rate for the cash-value account. Many policies have a minimum interest rate for downside protection as well as a maximum interest rate, according to SamuelsonDesign, an insurance consulting firm.

Indexed universal life insurance has been around for about 10 years, but sales jumped 50% year-over-year in the first quarter of 2010 to $175 million, outpacing sales of all other forms of life insurance, according to LIMRA, an insurance industry research firm. Why? Perhaps because indexed universal life insurance resonates with investors who are still reeling from the financial crisis of 2008 and 2009. It offers a guarantee against losses so investors can sleep at night, but it also offers a measure of upside potential.

Indexed universal life insurance can get complicated, however. For example, in addition to caps on gains, these policies often have participation rates. Insurers typically exclude an index’s reinvested dividends. Additionally, rates and caps can usually be adjusted within certain limits.

As a result, if you’re considering indexed universal life insurance, you may want to consult your insurance professional. He or she can tell you if indexed universal life insurance is suitable for you and, if it is, help you choose a policy.