Over the years life insurance offerings have evolved and emerged based upon the needs for consumers to mitigate their risks while still remaining flexible. Two such products that were created are called index universal life and variable universal life. Both of these are advanced life insurance products, and are typically reserved for more investment savvy individuals.
Index Universal life
Index universal life insurance has a greater cash value potential than its predecessor; universal life insurance. The premiums are flexible and you can make additional payments at any time. When a premium is paid, a portion pays for annual renewable term insurance, some is taken out by the insurance company to cover fees and then the balance is added to the cash value of the policy. The cash value is tied to the performance of an equity index such as the S&P 500 or the Dow Jones but not directly invested in it, making index universal a less risky investment. When the Index increases, the gains are added to the policy, however, if an index falls there is no loss to the cash value of the policy.
A minimum performance level is set by the insurance company, which typically mirrors the index’s historical performance rates. The insurance company’s goal is to outperform the index. A portion of the gains -called the ‘participation rate’ - gets credited to the policy. Participation rates can range from 25% to over 100% of the index’s positive performance. In essence, you are sharing the gains of the index with the insurance company.
The benefit to this type of plan is that the insurance company and policy holder have aligned interests.. Cash value increases to index universal life insurance policies are tax deferred.
Additionally, with index universal life insurance, there is still a guaranteed death benefit for the beneficiary. Index universal life also has a loan feature available that can be utilized for ‘Infinite Banking’ type investment strategies. Index universal life insurance generally has lower premiums than universal life. There are, however, potential drawbacks to this type of policy. The main drawback to consider is that the cash value, over time, can be lower than premiums paid due to market performance and fees. Also, unpaid loans - plus interest - and withdrawals will also reduce the death benefit and cash value of the policy.
Variable Universal Life
A variable universal life insurance policy is similar to universal life, however, it allows greater flexibility and more control. As with other types of insurance, the premiums you pay into a variable universal life policy accumulate a cash value. The cash value grows in relation to a mutual fund(s) that the policy holder chooses for the policy.
Variable universal life offers flexible monthly premiums, meaning you can put more into the policy if you choose to. The cash value grows tax deferred, which can be advantageous if you hold the policy long term. In addition, this type of insurance has the same lending options mentioned in previous articles. As with most life insurance policies, variable universal insurance carries a death benefit. The death benefit is also flexible depending upon the amount of the premiums.
Depending upon your needs, and risk tolerance, these advanced insurance options might be more beneficial to you than traditional policies. Variable universal life can be more volatile than index universal life, but can also see greater gains and provide you with more control. If you want to insulate your cash assets from market drops, and don’t mind sharing a percentage of the gains, an index universal life may be the most attractive option. As always, consult a professional before investing in any life insurance options.