Advantages of Index Universal Life Insurance

Equity Index Universal Life (EIUL) insurance allows a holder to have the flexibility to adjust their premiums as well as benefit from the performance of the financial markets. An EIUL policy is a form of permanent life insurance that ties the cash value of the policy to a financial index. The policy has a fixed interest rate portion as well as the indexed account. Overall, it combines the benefits of a universal life policy with an indexed investment. The S&P 500 Index is used by most companies as the underlying index for the product.

Typically, EIUL policies will have a ceiling as well as a floor established for the returns. In this way, the policy will never lose money. However, if the financial index is doing better than expected, an investor could potentially not see all of the benefits.

With the flexibility that a purchaser gets from an EIUL policy, they also have additional risk. On average a traditional universal life policy will increase 4 to 6% per year. An EIUL can achieve index-linked gains as high as 18%. However, there can also be years when the return is less than 4%. There is, however, not as much risk with a index universal life insurance policy as with investing directly in an index fund.

So how can an insurance company offer customers the benefits of an index fund without passing the entire risk on to them? The answer is that insurance companies are not actually investing the premiums in an equity index. They will invest the premiums in fixed-interest investments and call options.

Potential customers who are shopping for EIULs should consider the following items when they are comparing different policies:
• Cap - What is the maximum annual increase?
• Participation rate - How much does the account grow when the index performance is positive?
• Asset fees - How much is deducted in fees from the index's performance?

The cap growth rate varies, but it is typically in the 10 to 14% range. The guaranteed minimum gap is in the 3 to 4% range. The participation rate is listed as a percentage. For example, if the underlying index is the S&P 500 and it increases 10% and the participation rate is 65%, then the EIUL would be credited with interest of 6.5%. Participation rates vary from 60% to 135%.

Almost all insurance companies credit interest based on the annual point-to-point method. This means that the equity-index value each year is compared to the value at the beginning of the year. Even though this is the most common method, it is important to confirm which method is being used before a policy is purchased. It is also important to check when minimum EIUL guarantees are credited to the account. Some companies may not do this annually. Instead, they will credit the guarantees every five years or even over the lifetime of the policy.

EIULs offer policy holders many benefits. In addition to the ones listed above, they have the ability to determine how much of the premium goes into the indexed account. However, EIULs can be confusing. Someone considering purchasing this product should consider all of the options associated with the policy and understand how the crediting mechanisms will operate over the life of the product before they make the final decision to go ahead.