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A universal life insurance policy is a flexible form of permanent life insurance that offers the low-cost protection of term life with a savings element. Indexed universal life insurance lets the policyholder allocate cash for savings to a fixed or equity-index account like the S&P 500, so cash grows tax-deferred while maintaining a death benefit.

After the term life insurance element and all other fees are covered, the remaining balance of each premium goes to the policy’s cash value, which receives interest based on the performance of an equity index or a guaranteed fixed rate. The money is not directly invested in the stock market, making IUL policies less risky than variable universal life policies.

Gains are credited either monthly or annually to the policy’s cash value based on the participation rate, which the insurance company sets. For example, say a policy’s equity index gains 6% over a month, and its participation rate is 50%. If the cash value is $10,000, then it grows by $300. That’s 6% multiplied by 50%, then multiplied by $10,000.

The cash value of an IUL is tax-deferred, and it can be used to pay the typically inexpensive premiums. And IULs offer the flexibility of controlling the amount risked in the accounts, and the ability to adjust the death benefit.

On the other hand, IUL policies cap accumulation percentages, and they don’t work well with smaller face values. Also, if the index goes down, the cash value does not grow.

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