How Does Indexed Universal Life Insurance Work?

Today, there are many different types of life insurance policies on the market. One of the newest – and most flexible – is indexed universal life. This type of policy is thought by some to offer the “best of both worlds” in that it provides death benefit protection, along with some nice savings and investment features as well.

Perhaps your first question is this; will I qualify for life insurance?  Keep in mind that there are companies who offer life insurance without an exam or term life insurance with pre existing conditions, so don’t let anything stop you from getting the coverage you deserve.

How Does Indexed Universal Life Insurance (IUL) Work?

Indexed universal life insurance works in a similar fashion to a regular universal life insurance policy in that it provides a death benefit component and a cash value component. Within the cash value component, the funds will grow, based on an underlying index, such as the S&P 500 or NASDAQ 100.

There are some parameters that are set within the cash portion of an indexed universal life insurance plan, whereby the policy holder can only earn a maximum amount of interest per year. This, however, is offset by the fact that they are also guaranteed a minimum amount of return, or “floor,” as well.

For example, an indexed universal life insurance policy will set a cap rate. This means that the interest that is earned in the cash value will earn a maximum rate per year. Therefore, as an example, if the index that is being tracked by the policy returns 11% for a certain time period – and the annual cap on the policy is 10% – then the most that the policy holder will earn on the cash value component for that year will be 10%.

However, there is also a floor that is set with indexed universal life insurance policies. This feature will help in guarding against market losses in the cash value account. The floor is the minimum amount of annual interest that that policy will be guaranteed in a given time period.

Therefore, if the cash value is guaranteed not to go below 1% for a given year, even if the underlying index has a year when it returns a negative 14%, the policy holder will still return 1% on his or her cash for that period of time.

Advantages of Indexed Universal Life Insurance

Although indexed universal life insurance provides some of the same protections that other types of permanent life insurance does, this type of coverage also offers a great deal more in terms of its overall flexibility. Some of the benefits that are offered by this product include:

  • Tax free death benefit – One of the biggest benefits of any life insurance policy is the fact that the death benefit is free from federal income taxation to beneficiaries. This allows loved ones the use of the full amount of proceeds for paying off debts, replacing income, or any other need that they see fit for its use.
  • Tax deferred growth – Also like most other permanent life insurance products, the cash that is inside the cash value component of an indexed universal life insurance policy is allowed to grow on a tax deferred basis. This allows the funds to accumulate and compound even faster than if they were taxed each year.
  • Additional growth opportunitiesUnlike whole life and many other types of universal life, indexed universal life insurance policies allow the crediting of interest of funds in the cash value component based on the performance of an underlying index such as the S&P 500. Therefore, the cash in these types of policies can essentially accumulate even more.
  • Funds can be taken out tax free as income – By taking out tax free loans or withdrawals, the policy holder of an indexed universal life insurance policy can essentially receive tax free income in retirement. This means that income from these policies do not need to be recorded as income to the IRS (Internal Revenue Service).
  • Annual resetting of gains – Unlike a mutual fund or a stock, gains in the cash account of an indexed universal life insurance policy are essentially “locked in” each year and can never be taken away based on future market downturns. This will protect funds from the market’s ups and downs going forward.
  • Protection from lawsuits and creditors – In some states, life insurance cash values are also protected from lawsuits and from creditors – including bankruptcy, to an unlimited dollar amount. (This varies by state).
  • No probate issues – Because life insurance proceeds can pass directly to a named beneficiary, these funds will not be held up in the costly and time consuming process of probate.
  • Protection from market losses – The cash value component in an indexed universal life insurance policy also offers protection from market losses. This means that principal is protected, regardless of what occurs in the market, or even in the economy overall.

Getting Cheaper Indexed Universal Life Insurance

Indexed universal life insurance is an excellent option for life insurance protection, especially for anyone that wants to use their life insurance for more than just insurance coverage. Indexed universal life insurance tends to be much more expensive than other types of life insurance options, but that doesn’t mean that your plan has to break your bank every month. There are several changes that you can make that will help you secure much lower premiums, which is going to mean more money in your pockets.

One of the easiest ways is to cut out any tobacco that you currently use. Smokers are at a much higher risk for being diagnosed with several severe health complications, which means they are going to be more of a risk for life insurance. The insurance company is going to offset that additional risk by raising your premiums. In fact, smokers are going to pay premiums that are at least twice as more expensive than what a non-smoker is going to pay for the same sized policy. If you want to save thousands of dollars, cut any tobacco that you currently use.

Another way that you can save money is by improving your overall health. Before the insurance company gives you life insurance, they are going to require that you take a medical exam, and the results of that exam are going to impact how much you pay. If you want to get cheap whole life insurance, you’ll need to improve your health.

The two best ways to do that are by starting an exercise program and cutting out some of the junk food. Both of these can help you lose those extra pounds, lower your cholesterol, lower your blood pressure, and reduce your risk of being diagnosed with any health complications. If you’re overweight, your premiums are going to be around 50% higher. If you want to save money, it’s time to lace up those running shoes and hit the gym.

The best way to ensure that you’re getting the best indexed universal life insurance plan is to compare dozens of different companies before you decide which one is going to work best for you. Every company is different, and all of them are going to offer you different rates based on their algorithms and benefits. Finding the right company could be the difference in getting an affordable indexed policy or having a plan that breaks your bank every month.

Instead of wasting hours and hours calling different companies to get quotes, let one of our independent insurance brokers do all of the work for you. We work with some of the most highly rated companies across the nation, which means that we can bring all of the lowest rates directly to you. Our independent brokers have years of experience working with all types of clients and we know which companies are going to give you the best premiums based on your specific situation.

Indexed universal life insurance can offer a great way to build up tax deferred savings, while at the same time protecting principal from market losses. In addition, the death benefit can offer loved ones peace of mind in knowing that expenses will be covered in the event of the unexpected. Let us help you find final expense insurance quotes today.

You never know what’s going to happen tomorrow, which means that you shouldn’t wait any longer to get the insurance protection that your family deserves. If you have any questions about indexed universal life insurance or the other options for coverage, please contact one of our agents today. We will answer those questions and connect you with the perfect policy for you.

About Jack D. Davis at
About Jack D. Davis at

Jack D DavisBorn and raised in a quiet suburb of Philadelphia, PA, the youngest of nine children, son of two wonderful parents, Jack developed his work ethic early on. While attending West Chester University, he volunteered to join the US Army Reserves for a six-year enlistment. Attending college during the day, working evenings, and fulfilling his military obligation on various weekends, Jack learned the value of hard work and time management. After graduating from college (BS in Business Management), he began working as a sales representative for a Fortune 100 company and honed his marketing skills. In 1985 Jack started his financial planning career as an agent with Mutual Benefit Life.  After Mutual Benefit Life ran into financial difficulties, Jack decided to “go it alone”. His company, “Eagles Soar Enterprises, LLC.” successfully grew for almost 30 years. Jack’s skill-set is understanding and recognizing the personal needs of families and business owners. His patience in explaining the numerous options available is greatly appreciated by his clients. Jack agrees that life insurance is a difficult topic and people are rarely “excited” about discussing the subject. When Jack was 23 he witnessed firsthand how important life insurance is when he lost his Dad to cancer. Jack’s Mom used the life insurance proceeds to help minimize the financial loss.  Jack recognizes how critically important proper insurance planning is to the surviving spouse, business partner and, most importantly, the children of his clients. In his free time Jack enjoys playing tennis, horseshoes, ping pong, exercising, reading and attending Philadelphia Eagles football games. Jack has two wonderful children and currently resides in beautiful St. Petersburg, FL. Questions? Call Jack at 1.800.277.3098 or email:

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