There are many different types of life insurance policies on the market. When you’re buying a policy, it can be confusing to figure out which one is right for you. But if you’re a confident stock market investor, indexed life insurance might be a good option. In this article, we’ll break down what indexed life insurance is, how it works and how much it costs.
What is indexed life insurance?
Indexed universal life insurance is a type of permanent life insurance, meaning it offers coverage for your entire lifetime. While similar to universal life insurance, indexed life insurance has the potential for higher cash value growth. Although it’s a riskier policy than whole life insurance, for example, an indexed life insurance policy can grow significantly during a strong market year.
How does indexed life insurance work?
Like all permanent life insurance policies, an indexed life insurance policy has a death benefit.
You pay a monthly premium to keep the policy in force, and when you pass away your beneficiaries receive your death benefit to supplement their income and help pay for your end-of-life expenses.
Indexed life insurance policies also have cash value, which is essentially a savings account. When you pay your premium, a portion of the money goes towards your death benefit, 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 overtime. 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 have a “cap”, which is the highest amount of interest you can earn. Similarly, your policy will have a “floor”, which is the lowest amount of interest you can earn. Most policies have a floor of 0%.
There are a few ways that you can 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.
Who needs indexed life insurance?
Indexed life insurance is 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, but you should have a solid understanding of how the stock market works and which funds tend to perform the best. If you aren’t strategic about investing your cash value, you can lose money.
Here are some of the pros and cons of an indexed life insurance policy:
|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||More expensive than other policies|
How much does indexed life insurance cost?
Indexed universal life insurance is one of the most expensive types of life insurance you can buy. The amount you pay 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 be. So if you choose a death benefit of $3 million, 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 increase the price.
How do you get indexed life insurance?
As long as you can pass the medical exam, getting indexed life insurance isn’t difficult. Many national insurance providers sell indexed universal policies, including AIG, John Hancock, Nationwide, Prudential and Transamerica. Here’s a general overview of how the process works:
- Meet with an agent: To get indexed life insurance, you’ll want to meet with an agent in person. They’ll show you the projections for the policy’s cash value growth, which is based on past performance, fees and other costs. They’ll also go over the index options and explain the cap and floor of the policy.
- 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 take your vitals, screen for illnesses and ask you about your lifestyle.
- Customize and sign your policy: Once you’re approved, you’ll 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.
Frequently asked questions
What factors determine the price of indexed life insurance?
The price of indexed life insurance is determined by several personal factors, including your age, where you live and your gender. But the biggest variable is your health, which is why you must take a medical exam before you can get approved for coverage. Certain lifestyle factors, like if you smoke or work in a high-risk workplace, also contribute to your rate.
When should I get indexed life insurance?
You can purchase indexed life insurance at any age. The younger you are, the more time you’ll have to grow your cash value. However, most young people opt for a term life insurance policy because of the cheap rates. If you’re a young and savvy investor, there’s nothing wrong with purchasing indexed life insurance early, as long as you can afford the premium.
Who will benefit the most from indexed life insurance?
People who are confident and eager investors will benefit the most from indexed life insurance. In order to successfully grow your cash value, you need to be excited about the market. Otherwise, you run the risk of losing cash value due to bad investments. If you’re simply looking for a guaranteed death benefit or extra income during retirement, consider a different policy.