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What if you could get the flexibility of adjustable life insurance premiums and face value and an opportunity to increase cash value—would you go for it? What if you could get this without the inherent downside risk of investing in the equities market? All of this is possible with an indexed universal life insurance policy. These policies aren’t for everyone, so read on to find out if this combination of flexibility and investment growth is a good fit for you.
Indexed Universal Life allows the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P 500 or the Nasdaq 100. IUL policies are more volatile than fixed ULs, but less risky than variable universal life policies because no money is actually invested in equity positions.
The value of the selected index is recorded at the beginning of the month and compared to the value at the end of the month. If the index increases during the month, the interest is added to the cash value. The index gains are credited back to the policy either on a monthly or annual basis. For example, if the index gained 6% from the beginning of June to the end of June, the 6% is multiplied by the cash value. The resulting interest is added to the cash value. Some policies calculate the index gains as the sum of the changes for the period. Other policies take an average of the daily gains for a month. If the index goes down instead of up, no interest is credited to the cash account.
The gains from the index are credited to the policy based on a percentage rate, referred to as the participation rate. The rate is set by the insurance company. It can be anywhere from 25% to more than 100%. For example, if the gain is 6%, the participation rate is 50% and the current cash value total is $10,000, $300 is added to the cash value (6% x 50% x $10,000 = $300)