Equity Indexed Universal Life Insurance: A Flexible And Growth-Oriented Policy

 

Life insurance is a vital financial tool that can protect your loved ones from the devastating consequences of your untimely death. However, choosing the right type of life insurance can be a daunting task, especially when you are faced with a plethora of options and features.

One type of life insurance that might appeal to you is equity indexed universal life insurance. This is a unique policy that links your cash value to a stock market index selected by the insurer, such as the S&P 500 or the Nasdaq-100. It offers an interest rate guarantee that limits your losses and a cap on your returns that limits your gains.

But what exactly is equity indexed universal life insurance and how does it work? What are its advantages and disadvantages? And how can you decide if it is the best option for you?

In this article, we will answer these questions and more. We will explain what universal life and equity indexed universal life insurance are, how they differ, and what are the pros and cons of this type of policy. By the end of this article, you will have a better understanding of equity indexed universal life insurance and how it can fit your needs and goals.

What Is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance that provides coverage for your entire lifetime, as long as you pay the premiums. It also has a cash value component that accumulates over time and can be accessed through loans or withdrawals.

One of the main features of universal life insurance is that it has flexible premiums, which means that you can adjust the amount and frequency of your payments according to your budget and situation. You can also skip or lower your premiums if you have enough cash value to cover the cost of insurance.

Another feature of universal life insurance is that it has an adjustable death benefit, which means that you can increase or decrease the amount of money that your beneficiaries will receive when you die, subject to certain limits and requirements. You can also use your cash value to buy more coverage or reduce your premiums.

A third feature of universal life insurance is that it has a cash value component, which is a separate account within the policy that earns interest based on a rate set by the insurer. The cash value grows tax-deferred within the policy, which means that you do not have to pay taxes on the interest until you withdraw it. The cash value can also be used for various purposes, such as paying for education, retirement, or emergencies.

Universal life insurance is often compared to term life insurance, which is a type of temporary life insurance that only provides coverage for a specific period of time, such as 10, 20, or 30 years. Term life insurance has lower premiums than universal life insurance, but it does not have any cash value or flexibility. It also expires at the end of the term, which means that you will lose your coverage if you outlive it or stop paying the premiums.

What Is Equity Indexed Universal Life Insurance?

Equity indexed universal life insurance is a type of universal life insurance that links your cash value to a stock market index selected by the insurer, such as the S&P 500 or the Nasdaq-100. It offers an interest rate guarantee that limits your losses and a cap on your returns that limits your gains.

Equity indexed universal life insurance works by allowing you to choose how much of your cash value to allocate to an equity index account and how much to allocate to a fixed interest account. The equity index account tracks the performance of a stock market index selected by the insurer, such as the S&P 500 or the Nasdaq-100. The fixed interest account earns interest based on a rate set by the insurer.

The cash value in the equity index account grows based on the performance of the stock market index. If the index goes up, your cash value will earn more interest and grow faster. If the index goes down, your cash value will earn less interest and grow slower.

However, there are two important limitations on your cash value growth in the equity index account: an interest rate guarantee and a cap on your returns. The interest rate guarantee means that your cash value will never earn less than a certain minimum rate of interest, regardless of how low the index goes. The cap on your returns means that your cash value will never earn more than a certain maximum rate of interest, regardless of how high the index goes.

For example, suppose that your equity indexed universal life insurance policy has an interest rate guarantee of 2% and a cap on your returns of 10%. If the stock market index goes up by 15% in a year, your cash value will only earn 10% interest, not 15%. If the stock market index goes down by 5% in a year, your cash value will still earn 2% interest, not -5%.

Equity indexed universal life insurance differs from other types of universal life insurance in that it links your cash value to a stock market index selected by the insurer. It also differs from other types of equity indexed life insurance, such as equity indexed whole life or equity indexed variable life, in that it has flexible premiums and adjustable death benefit.

What Are The Benefits Of Equity Indexed Universal Life Insurance?

Equity indexed universal life insurance can offer you several benefits that other types of life insurance cannot. Some of these benefits are:

• Tax advantages: Equity indexed universal life insurance can offer you tax advantages, such as tax-deferred growth, tax-free loans and withdrawals, and income-tax free death benefit. The cash value grows tax-deferred within the policy, which means that you do not have to pay taxes on the interest until you withdraw it. The loans and withdrawals are tax-free as long as they do not exceed the amount of premiums you have paid into the policy. The death benefit is income-tax free to your beneficiaries, which means that they will receive the full amount of money without any deductions.
• Cash value benefits: Equity indexed universal life insurance can offer you cash value benefits, such as participating in market gains, earning higher returns than fixed-rate policies, and having access to various index options. The cash value in the equity index account grows based on the performance of the stock market index, which means that you can benefit from the upside potential of the market without taking on the downside risk. The cash value in the equity index account can also earn higher returns than fixed-rate policies, which have lower interest rates that are locked in for the duration of the policy. The cash value in the equity index account can also give you access to various index options, such as different stock market indices or asset classes, depending on the policy features and options.
• Protection benefits: Equity indexed universal life insurance can offer you protection benefits, such as providing lifetime coverage, guaranteeing a minimum death benefit, and adding riders for additional coverage. The policy provides lifetime coverage as long as you pay the premiums, which means that you will never outlive your policy or lose your coverage. The policy also guarantees a minimum death benefit, which means that you will always have a certain amount of money for your beneficiaries, regardless of how the market or the interest rate performs. The policy can also allow you to add riders for additional coverage, such as disability waiver of premium, accidental death benefit, or chronic illness benefit, depending on the policy features and options.

What Are The Drawbacks Of Equity Indexed Universal Life Insurance?

Equity indexed universal life insurance can also have some drawbacks that other types of life insurance do not. Some of these drawbacks are:

• Higher cost: Equity indexed universal life insurance can be more expensive than other types of life insurance, such as having higher premiums, fees, and charges than regular universal life policies. The premiums can be higher because they reflect the extra growth potential of the policy. The fees and charges can be higher because they cover the administrative and management costs of the policy. These costs can reduce your cash value and death benefit over time.
• Higher risk: Equity indexed universal life insurance can be more risky than other types of life insurance, such as being subject to market fluctuations, interest rate changes, and crediting rate adjustments by the insurer. The cash value in the equity index account can be affected by market fluctuations, which means that it can go up or down depending on the performance of the stock market index. The cash value in the equity index account can also be affected by interest rate changes, which means that it can earn more or less interest depending on the movement of the interest rate. The cash value in the equity index account can also be affected by crediting rate adjustments by the insurer, which means that the insurer can change the rate at which it credits interest to your account based on its profitability and expenses.
• Higher complexity: Equity indexed universal life insurance can be more complex than other types of life insurance, such as requiring more understanding and monitoring of the policy features and performance. The policy requires more understanding because you need to comprehend how the equity index account works and what benefits and drawbacks it offers. The policy requires more monitoring because you need to keep track of the stock market index performance, interest rate movements, and crediting rate changes that determine your cash value and death benefit growth.

Conclusion

Equity indexed universal life insurance is a type of universal life insurance that links your cash value to a stock market index selected by the insurer. It offers an interest rate guarantee that limits your losses and a cap on your returns that limits your gains.

Equity indexed universal life insurance can offer you tax advantages, cash value benefits, and protection benefits that other types of life insurance cannot. However, equity indexed universal life insurance can also be more expensive, risky, and complex than other types of life insurance.

Therefore, before you decide to buy an equity indexed universal life insurance policy, you should carefully weigh the pros and cons of this type of policy and compare it with other types of life insurance. You should also consult an independent agent or broker who can help you find the best policy for your needs and goals.

If you are interested in learning more about equity indexed universal life insurance and getting quotes from different companies, please contact us today. We are here to help you find the best solution for your financial security and peace of mind.