Loading the player...

What is 'Equity-Indexed Universal Life Insurance'

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index.

Breaking Down 'Equity-Indexed Universal Life Insurance'

Equity-indexed universal life insurance, like all universal life insurance, builds a cash value that the insured can borrow against, invest with and use to cover increases in the cost of insurance, potentially eliminating out-of-pocket premium payments should the cash value overtake increases in the costs of insurance.

Unlike variable universal life insurance, which allows policyholders to invest a portion of the cash value into a range of funds and stocks with various risk profiles, equity-indexed universal life insurance offers policyholders the opportunity to place the cash value in an equity index account, which pays interest according to a market index without actually investing the money in the market.

If the relevant market index increases, the tax-deferred cash value of the policy increases according to the participation rate. For example, if the market index increases by 5 percent and the participation rate is 50 percent. The cash value will increased by 2.5 percent, or 50 percent of 5 percent.

Policyholders need not choose one account in which to deposit the cash value accumulations. They may assign the money to several accounts, which tie returns to different indexes or to a fixed interest rate, in a proportion of their choosing.

As with all universal life policies, the insurance company collects any remaining cash value for itself and pays out only the death benefit upon the death of the insured.

Pros and Cons of Equity-Indexed Universal Life Insurance.

Equity-indexed universal life insurance policies offer some of the benefits of variable universal life insurance without the risk of holding positions in the stock market. For example, if the market drops, the cash value of an equity-indexed universal life insurance policy won’t drop with it. It simply won’t rise. That said, the cash value of such a policy can decrease if premium payments outpace interest.

Equity-indexed universal life insurance policies are attractive because of their relatively low premiums, cash value that grows tax-deferred and permanent death benefits.

On the other hand, the participation rate, the percentage of market increases by which the cash value grows, is usually less than 100 percent, meaning that the cash value will grow more slowly than the market as a whole. Further, equity-indexed universal life insurance policies are a form of advanced life insurance, a complicated life-insurance vehicle that is difficult to explain or understand. Investors should refer to their unique needs and insurability when deciding whether to purchase an equity-indexed life insurance policy.

RELATED TERMS
  1. Life Insurance

    Life insurance is a contract in which the insurer guarantees ...
  2. Permanent Life Insurance

    Permanent life insurance refers to plans that do not expire, ...
  3. Term Life Insurance

    Term life insurance is a type of life insurance that guarantees ...
  4. Yearly Price Of Protection Method

    The yearly price of protection method determines the cost of ...
  5. Policy Loan

    A policy loan is issued by an insurance company that uses the ...
  6. Add To Cash Value Option

    An add to cash value option is a life insurance policyholder's ...
Related Articles
  1. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  2. Insurance

    How Cash Value Builds in a Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy.
  3. Financial Advisor

    Pros and Cons of Indexed Universal Life Insurance

    Indexed universal life insurance has its pros and cons. Here's what you need to consider before purchasing a policy.
  4. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  5. Insurance

    How Good of an Investment Is Life Insurance?

    Compared to other options, does it ever make sense to include cash-value life insurance in your investment portfolio? A look at the pros and cons.
  6. Financial Advisor

    Life Insurance: Variable Vs. Variable Universal

    Do you know why you might need one policy versus the other? Read on to find out the difference between Variable and Variable Universal life insurance.
  7. Insurance

    What Is the Best Age to Get Life Insurance?

    Learn about the optimal time for purchasing personal life insurance and why delaying the buying decision may have costly consequences.
Trading Center