Indexed universal life insurance, or IUL, lets you take advantage of market gains, while avoiding losses. Learn how IUL works and its pros and cons.
In exchange for paying premiums, life insurance provides beneficiaries with a large payment upon the insured’s death. It’s a way to protect your family after you pass, especially if that happens when they still depend on you financially. But there are many varieties of life insurance, including indexed universal life (IUL) insurance. This allows the cash value of your policy to grow when certain stock market indexes are doing well, while protecting you from losses.
Indexed universal life insurance, or IUL, is a type of universal life insurance. Rather than the cash value portion growing on a fixed interest rate, it’s tied to the performance of a market index, like the S&P 500.
Unlike investing directly in an index fund, however, you won’t lose money when the market has a downturn. This is because a guarantee applies to your principal, insuring it against losses. On the other hand, there’s usually a cap on the maximum return you can earn. Many times, you’ll also be able to divide your a-sets between fixed and indexed portions of your policy.
To better understand IUL, it helps to have a grip on the main types of life insurance. Broadly speaking, the two main versions are term life insurance and permanent insurance. Within the latter category, there are many varieties, the most common of which are whole life and universal life insurance.
Whole life insurance: This is a permanent policy, which means that there’s no time limit on when your family can receive a benefit. Furthermore, some of the premiums you pay go toward funding a cash account. Once enough money inhabits that account, it will fund your eventual payout. However, you can also borrow against or withdraw from the cash while you’re still alive.
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