Life insurance policies are designed to pay out a benefit to your beneficiaries if you pass away while the policy is active, but some policies can do more. Indexed universal life insurance policies include a cash value component that can earn, or lose, money invested in an index fund. These policies provide the traditional function of life insurance while incorporating investment features usable during the policyholder’s lifetime. As a form of permanent life insurance, these policies can stay with you until you die, so long as you continue paying the premiums. Bankrate’s comprehensive guide to indexed life insurance may help you decide if this policy could be right for you.

Key takeaways

  • Indexed life insurance policies have a cash value component that is tied to stock market performance through index funds of your choosing.
  • The cost of an indexed life insurance policy depends on your coverage amount and personal factors such as your age, gender, health and lifestyle.
  • You can use your cash value component to pay premiums, increase your death benefit or take out a loan, but what's left when you pass away will not be added to the death benefit.

How does indexed life insurance work?

Like all permanent life insurance policies, an indexed life insurance policy pays out a death benefit to your beneficiaries as long as premiums are paid and the terms of the policy are met. The size of the death benefit and the cost of your premiums depends on the details of your specific policy.

Cash value component

Indexed life insurance policies also have a cash value component, which is essentially a savings account. When you pay your premium, a portion of the money goes towards your death benefit, policy riders and other fees – and the remainder is put into your cash account.

The main thing that makes indexed life insurance different from other policies is that the cash value is tied to stock market performance. Your insurance company invests the money in your cash account, which allows it to earn interest and grow over time. Once your cash balance reaches a certain point, you can use that money to cover your premium rather than paying out of pocket.

When you purchase an indexed life insurance policy, you can choose the index you want to invest in, like the Dow Jones or S&P 500. These types of policies typically have a “cap,” which is the highest amount of interest you can earn. Similarly, your policy will likely have a “floor,” which is the minimum amount of interest you are guaranteed to earn, regardless of the market’s performance.

There are a few ways that you may be able to use your cash value. You can use it to pay your insurance premium or use the money to increase your death benefit. Another option is to borrow against your cash value as a loan if you need to cover unexpected costs, like medical bills. Keep in mind that, in most circumstances, the cash value portion of your policy is only accessible while you are still alive and will not be included in your death benefit.

Who needs indexed life insurance?

Now that you know what an indexed life insurance policy is, you may still be wondering whether it’s right for you. Indexed life insurance may be a good option for people who are confident in the stock market and want to use their life insurance policy as an investment vehicle. You don’t need to be a licensed trader to purchase indexed life insurance, but you may want to consult with a licensed financial professional before pursuing this type of policy as an investment vehicle.

Pros and cons of indexed universal life insurance

Here are some of the potential benefits of indexed universal life insurance policies, along with the potential downsides:

Pros Cons
High potential for cash value growth Potential to lose money
Can use cash value to pay your premium Cap on interest earned
Flexible death benefit Usually more expensive than other policy types
Potential for tax-free capital gains Cash value portion is not typically included in your death benefit

Because indexed life insurance is tied to the stock market, these policies allow for the possibility of high cash value growth. You can then use this accumulated cash value to pay your premium. Those who like to have choices within their policy may appreciate that the death benefit is flexible. However, indexed life insurance policies are risky. While you have the potential to gain money, you also have the potential to lose a lot of money. In addition, the amount of interest you can earn on your money is generally capped.

How much does indexed life insurance cost?

The amount you pay for indexed life insurance is based on various personal factors, like your age, health, lifestyle and gender. Most indexed life insurance policies require a medical exam, which is also used to calculate your premium.

The more coverage you have, the higher your premium will generally be. So if you choose a death benefit of $3 million, you can expect to pay a much higher premium than you would for a death benefit of $500,000. If you add riders to your policy, those will also usually increase the price.

How to get indexed life insurance

As long as you can pass the medical exam, getting indexed life insurance may be fairly easy. Many national insurance providers sell indexed universal policies, including Corebridge FinancialJohn HancockNationwidePrudential and Transamerica. Here’s a general overview of how the process works:

  1. Assess your financial situation: While not mandatory, it may be a good idea to speak with a certified financial planner to better understand your long-term financial goals and how life insurance may help you reach them before you decide what type of policy and limits are right for you.
  2. Research companies and get quotes: Life insurance quotes do not vary as much from company to company as home or auto insurance, but you may want to compare providers based on other factors that matter to you. These may include customer service, available riders and digital tools. Once you compare quotes and find the best company for your needs, you may be ready to apply for a policy.
  3. Take the medical exam: The next step will be to speak with an underwriter about your medical history and schedule your medical exam. During the exam, a medical professional will likely take your vitals, screen for illnesses and ask you about your lifestyle.
  4. Customize and sign your policy: Once you’re approved, you can work with an agent to choose your coverage limit, add riders and select your investment index. Once you’ve signed the policy, your coverage will begin as soon as you make the first payment.

Alternatives to indexed life insurance

Indexed life insurance is not the only type of life insurance available to you. If you haven’t decided on a policy type yet, you may want to consider the following life insurance options:

Whole life insurance

Whole life insurance is a type of permanent life insurance in which beneficiaries are guaranteed a payout as long as the terms of the policy are met. Whole life policies also include a cash value account that potentially accrues interest or returns. The policyholder can withdraw funds or borrow against this money before their death. Unlike indexed life insurance, whole life cash value components are tied to a fixed interest rate rather than the stock market’s performance. 

Term life insurance

Term life insurance covers the policyholder for a set amount of time – usually between one and 30 years. If the policyholder dies during the term, their beneficiaries will receive a payout as long as premiums are paid. If the policyholder dies after the policy ends and they do not convert or extend their policy, their beneficiaries will not receive a payout. This form of life insurance may be helpful for those who only want coverage for a set amount of time – for instance, when their children are young.

Universal life insurance

You may be comparing universal life vs. indexed universal life. Universal life insurance lets policyholders adjust their premium and death benefit amounts over the course of their policy, provided that they have enough money in their cash value account to do so. The ability to customize in this way separates universal from whole life insurance.

Guaranteed issue life insurance

Guaranteed issue life insurance may be a great option for older applicants or those with medical issues. It may be difficult to find affordable life insurance coverage if you are elderly or have a high-risk medical condition. Guaranteed issue life insurance allows you to get life insurance without undergoing medical exams or answering health questions. As a result, premiums are typically high and the coverage amount is typically low.

Final expense life insurance

Final expense policies are meant to cover costs associated with the policyholder’s funeral and burial. These policies typically have low monthly premiums and a low death benefit. These policies may also be available without a medical exam.

Frequently asked questions

    • The price of indexed life insurance is determined by several personal factors, including your age, where you live and your gender. However, the biggest variable is your health, which is why you almost always have to take a medical exam before you can get approved for coverage. Some companies may allow you to purchase an indexed life insurance policy without a medical exam, but the premium on these policies is usually much higher, and the coverage amounts may be lower. Certain lifestyle factors, like smoking or a high-risk job, affect your rate due to the increased risk for your insurance carrier. If a life insurance company is willing to approve you without a screening by a licensed medical professional, they are taking on a higher risk and will in turn, likely charge you more.
    • One of the key differences between these two types of permanent life insurance is how they handle their cash value components. Indexed life insurance uses index funds for investment, while variable life utilizes direct investments into securities. You may want to speak with an insurance agent before deciding which policy type may work for you.
    • People who are confident investors may benefit the most from indexed life insurance. This may include individuals who are already experienced with index fund investing or those who are willing to work with a licensed financial professional to navigate their cash value component. If you’re simply looking for a guaranteed death benefit or extra income during retirement, you may want to consider a different policy type.
    • The best life insurance company will be different for every customer. The best company for a shopper who values digital tools is likely different from the best company for someone who wants a unique or specific rider. To find the best insurance company for you, it may be beneficial to speak with a licensed insurance agent to nail down the type of insurance policy you want. From there, you may want to investigate the riders, customer service and digital tools from each company that offers your desired policy type.