Indexed universal life insurance (IUL) is a permanent life insurance policy that offers both a death benefit and the ability to grow a cash value over time. Your periodic premiums earn tax-deferred interest, which increases the cash value in your policy.
In addition to offering a traditional declared interest rate, IUL also allows you to earn interest linked to the movement of selected indexes, such as the S&P 500. This flexibility makes IUL policies unique compared to other life insurance types, providing the opportunity for higher returns.
How Does IUL Interest Work?
IUL policies are max funded with a cash value account, and interest is compounded based on the performance of the selected index. Unlike traditional universal life insurance, which relies on a fixed interest rate, an IUL allows you to choose how your cash account is linked to various equity index accounts. Here are the three key options within these policies:
- Equity Index Selection: Policyholders can choose from various equity index accounts and link their cash account to one or more indexes.
- Investment Options: You can choose between a fixed account, where interest rates are guaranteed, or an equity index account, which is subject to market performance.
- Multiple Indexes: Access a wide variety of indexes like NASDAQ, S&P 500, Credit Suisse, and more.
The amount of cash available for investment is limited by the periodic premium minus the cost of insurance and administrative fees. However, this limit is flexible, allowing you to invest more cash if you pay higher premiums as insurance costs increase.
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Index Allocation Options in an Indexed Universal Life Policy
While many index allocations are available, the specific options you can choose will depend on the insurance company offering the IUL policy. It’s important to select a highly-rated insurer that provides excellent customer service and a strong historical return on the indexes they offer. Below is a limited illustration of some of the indexes provided by highly-rated life insurance companies:
| Insurance Company | Equity Index Account Examples |
|---|---|
| Lincoln Financial | Fidelity AIM – Dividend Indexed – Fixed Bonus |
| S&P 500 Fixed Bonus Indexed Account | |
| Prudential | S&P 500 Indexed Account |
| Goldman Sachs Voyager | |
| National Life Group | Credit Suisse Balanced Trend 5% |
| Hang Seng Index Cap Focus Strategy | |
| North American | Fidelity Multifactor Yield Index 5% ER |
| S&P 500 Annual Point-to-Point | |
| Allianz | PIMCO Tactical Balanced Index |
| Bloomberg US Dynamic Balance II Index | |
| Barclays US Aggregate Bond Index | |
| Bloomberg Barclays US Dynamic Allocation Index |
This is just a small selection of highly-rated insurance companies that offer Indexed Universal Life policies with a range of index options. As always, it’s best to consult with an independent insurance advisor who can help you review the historical performance of these indexes and assist you in making an informed decision.
How to Get Started
Starting an IUL is a straightforward process. To begin, you’ll want to determine which IUL company and index allocation options are best for your financial goals. Ask our advice and we can guide you through the various options available. For personalized advice, complete the form on the side of this page, and an advisor will reach out to help you with your decision.
Frequently Asked Questions
What is the most common index allocation used in an IUL policy?
Up until recently, the S&P 500 index was the most common. However, as carriers are creating their own proprietary indexes, we’re seeing a wider variety of index options being selected by policyholders.
What are some unique IUL allocation options to look for?
Allianz offers the PIMCO and Bloomberg indexes, North American provides the Fidelity MFY 5% index, and Lincoln includes the Fidelity AIM Dividend Indexed Account among its options.
Can allocation changes be made once the IUL policy is in force?
Yes. Allocation changes can typically be made on the policy anniversary each year, allowing you to adjust your strategy as market conditions change.
What are the best-performing indexes for IUL policies?
While the S&P 500 remains popular, other indexes like the NASDAQ 100, proprietary indexes from Credit Suisse, and Fidelity’s options provide unique advantages, depending on your risk tolerance and investment goals.
How does the index allocation affect my IUL’s cash value?
Your index allocation determines how much interest your policy earns. Choosing higher-performing indexes can significantly increase your cash value, but it’s important to weigh the risks and potential caps associated with each option.
What happens if the index underperforms?
If your selected index underperforms, most IUL policies include a guaranteed minimum interest rate, ensuring that you won’t lose value even during poor market performance. However, your returns may be lower for that period.
Can I switch index allocation options later?
Yes, most IUL policies allow you to change your index allocation on the policy anniversary, providing flexibility to adapt your strategy as market conditions change.
