Indexed universal life insurance is a lot like universal life insurance, however it does have a couple of wrinkles not found in traditional universal insurance policies. Universal life insurance comes in many different forms, from your basic fixed-rate policy to variable models that allow the policyholder to select various equity accounts in which they can invest. An indexed universal life insurance policy gives the policyholder the opportunity to allocate cash value amounts to either a fixed account or an equity index account. Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100.
Indexed policies allow policyholders to decide the percentage of their funds that they wish to allocate to fixed and indexed portions. Also, these types of universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policyholder can receive in said account. Since these policies are seen as a "hybrid" universal life insurance policy, they are usually not very expensive (due to lack of management), and are safer than an average variable universal life insurance policy. However, the upside potential is also limited when compared to variable policies.
As is the case with any permanent policy, it's critical to carefully research all firms being considered in order to obtain the best universal life insurance policy possible.
Joe Allaria, CFP®
CarsonAllaria Wealth Management, Glen Carbon, Ill.
The complexity of indexed universal life insurance kicks in when you start to study how the interest or cash growth is calculated. To truly understand this will require you to either spend ample time studying the policy or have an enormous amount of trust in the person recommending it.
Make sure that the illustrations that are shown to you reflect a realistic rate of return. If they assume a 7% annual return, you need to ask the insurer to re-run something more conservative. Is it possible to get 7% on average over a long period of time? Yes. But to be safe, I would suggest projecting a more conservative return, like 4%.
You can also explore alternatives. Guaranteed universal life policies, for example, are straightforward and backed by a guarantee from the insurance company.