Indexed Life Insurance

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Indexed life insurance is permanent life insurance. Each month, part of your premium goes into an investment account that has the potential to earn returns – although these returns are almost always capped. Along with this investment cash account, indexed life insurance offers a death benefit like most other insurance policies.

Indexed life insurance may or may not be right for you. As with auto insurance, life insurance policies should be tailored to your individual preferences and needs. If you’re interested in indexed life insurance, you can find out what it is, how it works, who needs it and how to get it below.

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?

Now you know what is an IUL life insurance policy, but you may be wondering whether it’s right for you. 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.

Before investing in such a policy, you may want to speak with a licensed agent and consult index universal life insurance reviews.

Pros and cons of indexed universal life insurance

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

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 More expensive than other policies

Pros

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 choice within their policy will appreciate that the death benefit is flexible.

Cons

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 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 is usually easy. 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:

  1. Meet with an agent: To get indexed life insurance, you will likely want to meet with an agent in person. They can show you the projections for the policy’s cash value growth, which is based on past performance, fees and other costs. They will also go over the index options and explain the cap and floor of the policy.
  2. 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.
  3. 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.

Other types of 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 the policyholder pays their premium for the rest of their life, and their beneficiaries receive a set amount of money in the form of a death benefit. The policy also includes a savings or investment account that accrues interest or returns. The policyholder can withdraw funds or borrow against this money before their death. Is whole life insurance worth it? It depends on your goals. If you’re interested, you may want to speak with an insurance agent to discuss your needs.

Term life insurance

Term life insurance is different from whole life insurance. Term life insurance covers a policyholder for a set amount of time – usually between one and 30 years. If the policyholder dies after the policy ends, their beneficiaries will not receive a payout. This form of life insurance is 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 sets universal life insurance apart from whole life insurance.

Guaranteed issue life insurance

Guaranteed issue life insurance is a great option for those with medical issues. If you have high-risk medical conditions, you may be declined from a certain policy or your premium may be extremely high. 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.

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.

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.

What is the best life insurance company?

The best life insurance company will be different for every customer. 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 generate online quotes from the top life insurance providers in your area. Your rates will likely vary among insurers.

Written by
Elizabeth Rivelli
Insurance Contributor
Elizabeth has two years of experience writing for insurance domains such as Bankrate.com, The Simple Dollar, Coverage.com and NextAdvisor, among others. In addition to auto insurance, Elizabeth regularly writes about home insurance, renters insurance and life insurance. She also covers industry trends and general insurance education.
Edited by
Insurance Editor