An IUL also is known as an Index Universal Life Insurance Policy.

Indexed universal life insurance (IUL) is a type of permanent life insurance coverage that offers both death benefit protection and a cash value component.

The funds within the cash value are allowed to take part in the growth of an underlying market index, such as the S&P 500, while at the same time being protected from negative market downturns.

This is why, for many people, indexed universal life insurance can essentially provide the “best of both worlds” – the opportunity for growth, along with principal protection. No other life insurance policy can offer as much opportunity for cash value growth, as an IUL. We named these policies the king of cash value life insurance.

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How Does an IUL Work?

While indexed universal insurance works in many ways like a regular universal life insurance policy, there are also some key differences that can make this product an important tool for both financial protection of survivors, and also for retirement planning.

First, indexed universal life insurance policyholders have the opportunity for additional cash value growth due to the upward movement potential of the underlying market index – yet at the same time, indexed UL policies also provide a guaranteed rate of minimum interest.

This means that there is a “floor” below which the policy holder’s interest rate will not fall – which will, in turn, provide them with principal protection during a market downturn.

Key Policy Definitions

Caps

In return for principal protection, policy holders’ upward potential is typically “capped” at a certain percentage, or “cap rate,” of the underlying index’s growth within a certain period of time. So, for instance, a policy holder may only receive 90% of a 10% upward market movement – or a total of 9% – during a given year.

Floors

The floor is essentially a minimum guaranteed rate of interest that a policy holder will receive each year. Oftentimes, this may be 0%. However, this still means that there will be no loss – even if the index itself sustains a loss. So, if the index were to suffer a loss of 10% – or even 25% – in a give year, the policy holder would not lose a penny due to the guaranteed minimum floor.

Participation Rates.

The participation rate will determine how much of the underlying index’s increase will be used in computing the indexed interest rate. For instance, if the participation rate is 100%, then the policy holder would receive 100% of the indexed interest that is achieved within a certain time period.

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Why Consider an Indexed Universal Life Insurance Policy?

There are many reasons to consider an indexed UL policy as a part of your overall planning strategy. In addition to the income tax free death benefit that is received by the policy’s beneficiary, there are numerous advantages that these plans bring to the table during a policy holder’s life.
  • Flexibility of timing and placement of premium
  • Principal protection
  • High percentage of cash value accumulation
  • Tax-free receipt of funds in retirement
  • Annual reset of cash value gains
  • No minimum age requirement (as versus that of IRAs and other qualified plans)
  • No mandatory Required Minimum Distribution withdrawal requirement
  • Funds can avoid probate
  • Cash value may also be protected from creditors

Allocating the IUL Premium

When making your IUL premium payment, the policy holder may be able to choose different deposit options. Some insurance carriers use what is known as a “bucket” strategy for allocating the premium dollars.

For instance, each premium payment could be handled as a separate “bucket” – either fixed or indexed – and within the indexed buckets, they could even have different index starting points, different possible credited interest rates, and even different annual reset points with which to begin the next index period.

Example IUL Investment Choices.

As an example, a policy holder may be able to choose from options such as the S&P 500, the Russell, the Dow Jones, the Gold Index, and even from a variety of different foreign market indexes.

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