Guide · Indexed universal life · 2 min read
What is indexed universal life?
Indexed universal life, or IUL, is permanent life insurance with a cash value. The insurer credits interest to that cash value using a formula tied to a market index.
How the cash value is credited
The cash value is not invested directly in the market. The insurer credits interest based on how an index performs, using a formula in the contract. The formula usually has a cap or a participation rate that limits the credit. It also usually has a floor, often 0 percent, so the credited rate does not go below the floor in a down year. Policy charges still come out of the cash value.
Policy charges can still come out of the cash value in those years.
Flexible premiums and rising costs
Premiums are flexible within limits. The policy takes out a cost of insurance and other fees, and the cost of insurance usually rises as you age. If you pay too little, or the credited amounts are lower than assumed, the cash value may not cover the costs. The policy can then lapse.
Illustrations are not guaranteed
An illustration shows how a policy might perform under assumed rates. Those assumed rates are not guaranteed, and real results can be lower or higher. Ask to see an illustration that uses the contract's lowest assumptions. Ask for an in-force illustration each year, which shows where the policy stands today.
Loans and withdrawals
You can often take loans or withdrawals from the cash value. Both reduce the cash value and the death benefit, and loans charge interest. A large loan can cause the policy to lapse, and that can create a tax bill. A tax professional can explain how it applies to you.
What to ask your insurer
- What are the cap, the participation rate and the floor right now?
- Can the insurer change the cap or participation rate later?
- What are the cost of insurance charges, other fees and any surrender charges?
- What premium keeps the policy in force under the lowest assumptions?
- Can you send an in-force illustration?
- How would a loan or withdrawal change the death benefit?
This guide gives general information and is not advice on your own policy. Your policy contract and the insurer make the final call.