Indexed Universal Life Insurance (IUL) – Pros and Cons

You have many types of life insurance options when seeking to provide financial security for your family. The decision usually comes down to whether term or permanent coverage best meets your needs.

If you are looking for life-long coverage that matches flexibility with cash value, then keep reading. If you are looking for your most affordable option then term life insurance might be best for you.

What is an Indexed Universal Life (IUL) Insurance Policy?

An indexed universal life insurance policy is a permanent life insurance policy that offers death benefit protection and cash value growth. Interest is credited to your policy via a declared fixed rate or based on a formula that tracks the movement of a selected stock market index over a particular time frame.

If you have got the ins and outs of the IUL policy down, skip ahead to see the best IUL companies.


Pros and Cons of IULs

Pros

  • Life-long coverage
  • Cash accumulation
  • Tax deferred
  • Market loss protection

Cons

  • More expensive than term
  • Requires due diligence

Pros of an indexed universal life (IUL) policy

Life-long coverage

An indexed universal life insurance policy is a type of permanent life insurance coverage. This policy is designed to protect you and your family throughout your life. That means that in most cases, at any point you were to pass away, your beneficiary would receive a death benefit payout.

Cash accumulation

Since an IUL is a type of permanent life insurance policy it is equipped with the ability to accumulate a cash value. Your cash value grows according to either a Fixed Account Value or Index Participation Rate. A Fixed Account Value is where you receive a steady percentage of growth accumulation on your cash value, this is the less risky option.

However, a great benefit of the IUL is that your return can mimic the stock market without being directly invested. Each year the gains from your IUL are locked in captured. In other words, every year your gain will be secured along with your previous cash value total. Each year’s credited interest is locked in on the Index Crediting Date. From there, the company sets a new starting point called the “annual reset”. All interest credited during the prior period is locked in and will not be taken away due to negative index performance.

Within an IUL your insurance company does not invest your cash value in the stock market for you. Instead they give you a return based on the market index performance, called the Index Participation Rate. In addition the return has some limits.

The policy will spell out the limits, but generally many of the IUL providers are setting limits in the low teens for the maximum, and around 1-3% for the minimum.

This means that you’ll never get more than the Index Cap Rate maximum (whatever the max limit is for your policy) when the market index exceeds that amount. It also means that you’ll still get 1-3% (whatever the minimum is for your policy) when the market index drops below zero and has a negative year.

Keep in mind that it also means that you will not get any dividends from your investments, like you would if you were actually investing in the market.

Tax deferred

Indexed Universal Life is a tax-deferred policy. Similar to that of a 401(k) or an IRA, but different in many significant ways.

If you choose to build up your cash value in an IUL and use the protection during your working years, the policy will act much like any other tax-deferred product. The cash value will grow and you will not pay tax on the growth in the cash value. If you happen to close the account (not recommended) or take withdrawals instead of policy loans, you will pay taxes on the growth.

However, unlike the IRA and 401(k) accounts, there is a way to access the cash value tax-free without incurring any penalties. In addition, you can always withdraw from your cash value up the amount of the premiums paid in without being taxed because those premiums were paid in after-tax dollars.

Market loss protection

One of the most discussed indexed universal life insurance pros is the protection against market loss. As mentioned earlier, the locked-in gains are fantastic, but those can only be accomplished by protecting against a market loss. So the two provisions work hand in hand. The insurance company will provide you with a guaranteed minimum amount that will be attributed to your cash value. Typically the guarantee is around 1-3% and is attributed annually.

What this means for your cash value is that when there is a horrible year in the market, or even just a year in which the markets drop below zero, the amount that will be attributed to your cash value is the guaranteed minimum, called your Index Floor Rate. In a market that is volatile or significantly bearish (down) the minimum guarantee protects your cash value and keeps you on track toward your financial goals.

Now there may have been situations in which an insurance company went bankrupt and a guarantee wasn’t met, but those situations are the exception rather than the rule. And state governments take over when these situations arise so it’s not like you will lose everything. In fact you are likely to find yourself doing just fine but with a different insurance provider.


Cons of an indexed universal life (IUL) policy

More expensive than term life insurance

There are no two ways around it, you will pay more for indexed universal life than you will with term life. Term life insurance is always going to be the cheapest life insurance policy.

Requires due diligence

Another indexed universal life con would be the amount of care you have to take in maintaining your policy is going to be greater than with whole life insurance or term life.

Level term life is easy to maintain because you pay a fixed premium. Now when the initial term expires all best are off. But initially, the fixed premiums make term life simple.

Whole life is also easier to maintain because of the guarantees offered, particularly the guaranteed fixed premiums. You know what you have to pay and it takes a lot of variables out of the equation.

With an IUL, your premium can rise or fall depending on how you fund your policy and how your policy performs. It may be that you find yourself not having to make premiums for a time or you may find that you have to make huge premiums to keep the policy from lapsing.

Now that is the extreme scenario, but the fact remains you have to be more diligent with indexed universal life or risk it lapsing.


Top 5 Best Indexed Universal Life Insurance (IUL) Companies

1. North American Company for Life and Health

#1

With 4 different IUL policies to choose from, you can find the one to meet your need.

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North American offers 4 different IUL policies. Indexed Universal Life allows the owner to earn interest based on the movement of the stock market but without the risk of putting your money directly into the market.

The interest rate credited will never be less than zero, regardless of what the stock market return is in negative return years. North American uses various Crediting Methods, which vary by product and may include Annual Point-to-Point, Daily Averaging, and Monthly Point-to-Point. Daily averaging is highly advantageous because your money is credited to the indexing account the next business day after you send it in, as opposed to monthly, quarterly, or even yearly.

You also have “living benefits” which allow access to a portion of your death benefit early if you have a serious illness.

North American Company’s IUL options include:

  • Rapid Builder IUL
  • Builder IUL
  • Guaranteed Builder IUL
  • Survivorship GIUL

The Builder IUL policy offers many index choices, including the S&P 500, the Russel 2000 and the Nasdaq 100. At 3%, North American Company offers one of the higher fixed account minimums in the marketplace.

The RapidBuilder IUL is similar to the Builder IUL, except it focuses on building cash value quicker than typical IUL policies. This policy is excellent for anyone seeking early cash value accumulation, for anything ranging from:

  • paying off debt,
  • to investing in passive income assets,
  • to infinite banking.

The Survivorship GIUL offers survivorship life insurance protection of married couples or business partners that pays out the death benefit upon the death of the second spouse or partner.

For more information, please visit our North American Company page.

2. Penn Mutual

#2

Penn’s maximum flexibility and no lapse guarantee make their IULs a great option.

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As one of the best indexed universal life companies, Penn Mutual has some awesome indexed universal life insurance policies. Penn Mutual’s IUL policies offer adjustable death benefits and premium payments. The policies also include a No Lapse Guarantee keeps your policy active even if the cash surrender value falls to zero or below. Offering a fixed and indexed account (indexed to the S&P 500), a cash value enhancement rider, and a choice between level death benefit or increasing death benefit, Penn Mutual’s IUL offers maximum flexibility.

Penn Mutual’s IUL options include:

  • Accumulation Builder Choice Indexed Universal Life
  • Accumulation Builder II Indexed Universal Life
  • Survivorship Plus Indexed Universal Life

For more information, please visit our Penn Mutual page.

3. American National (ANICO)

#3

With multiple rider options, American National could be the right fit for your needs.

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ANICO Signature Indexed Universal Life is available in both a fixed interest crediting option, which correlates to the company declared interest rate, and index crediting option, which is subject to the performance of a specific index. The policy is currently indexed to the S&P 500. A fixed death benefit or increasing death benefit is available. The guaranteed minimum cap is 3% and the lowest interest credit is 0%, regardless of the performance of the index.

For more information, please visit our American National page.

4. Voya

#4

Offering multiple crediting strategies to help you maximize high cash value growth.

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Voya Indexed Universal Life – Global Choice offers multiple crediting strategies to help maximize high cash value growth. Fixed and indexed strategies available with a guaranteed 2% annual credited interest rate in the fixed strategy and 0% annual credited interest rate on amounts in any indexed strategy, even if the indexes have negative performance. Available for ages 0-90 years old, if qualified.

Note: Voya doesn’t sell individual life insurance policies any longer, but you may be able to get one through your employer.

For more information, please visit our Voya life insurance page.

5. Minnesota Life (Securian Financial)

#5

Minnesota Life is uniquely positioned to offer IULs up to age 85.

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Orion Indexed Universal Life and Eclipse Indexed Life Insurance from Minnesota Life offers some excellent options. You can chose a fixed account or indexed account depending on your needs and objectives. Fixed account is guaranteed (as of 2020) never to be less than 2% annually. Indexed accounts have a guaranteed 0% crediting rate. Market indexed choices include the S&P 500, BLENDED  Index and EURO STOXX 50. Available for ages 0-85.

3 Death Benefit Options

  • Death benefit equal to the face amount
  • Death benefit equal to face amount plus accumulation value
  • Death benefit is equal to the face amount, plus the sum of premiums, less cumulative partial surrender

For more information, please visit our Minnesota Life page.


Indexed Universal Life Insurance Riders

There are more indexed life insurance riders available but some of the best IUL riders are:

  • Accelerated Benefit Rider – pays out a portion of death benefit if you are diagnosed terminally ill.
  • Guaranteed Insurability Rider – Offers you the option to increase coverage at certain years and dates without evidence of insurability.
  • Adjustable Term Insurance Rider – Add term life insurance to your policy to increase the death benefit in the early years
  • Additional Insured Rider – additionally coverage for an insured spouse or children
  • Chronic Illness Rider – pays out a portion of the death benefit to help pay expenses if you become chronically ill
  • Long term care rider – a long term care rider provides an income benefit to help cover long term care costs associated with in home care, a nursing home, or an assisted living facility.

Bottom line: Indexed universal life insurance policies offer great benefits.

There are many positives to an IUL policy such as flexible rates and cash accumulation. The unique feature of the indexed universal life insurance policy is that it can follow the stock market to yield a return without being directly invested. This means you have the potential to yield a higher return than a fixed cash accumulation account without the risk of being directly invested in the market.

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