Indexed Universal Life Insurance
Flexible-premium permanent coverage with index-linked cash value, for residents of Texas, Colorado, South Carolina and Michigan.
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Indexed universal life insurance, or IUL, is a form of universal life insurance. It gives permanent coverage with a flexible premium, and the cash value can earn interest tied to the performance of a stock market index. The Texas Department of Insurance notes that some permanent policies tie cash value growth to indexes; on IUL, a rate cap limits the interest credited in a strong year and a floor limits how little is credited in a weak one.
Parts of an Indexed Universal Life Policy
The Texas Department of Insurance defines the index terms in its guide to index-linked annuities, and indexed universal life policies use the same terms for their index accounts:
| Indexing method | How the change in the index is measured over the index term, when the company figures the interest and credits it. |
|---|---|
| Participation rate | How much of the increase in the index is used to figure the index-linked interest. |
| Rate cap | The most index-linked interest the account can earn for the term. |
| Floor | The least index-linked interest the account will earn. Read the contract for the floor it sets. |
| Monthly deductions | Universal life insurance charges and expenses come out of the cash value every month, whatever the index did. |
Because the monthly deductions continue in years when the index credits little or nothing, the cash value can shrink, and the policy needs enough value or premium to stay in force.
Indexed Universal Life Compared With Other Permanent Coverage
Whole life has a set premium and a cash value that grows at a contract rate. Universal life lets the owner change the premium and the death benefit. Indexed universal life keeps that flexibility and adds the index-linked interest option. Variable universal life invests the cash value in sub-accounts that can gain or lose money; it is a security, and FINRA's page on insurance products for investors explains the added rules that come with it.
The Texas Department of Insurance life insurance guide adds a caution that applies to every universal life policy: the company sends a yearly statement showing the cash value and how long the coverage might last, and higher premiums may be needed to keep the policy in force to its maturity date.
IUL Policies for Texas, Colorado, South Carolina and Michigan Residents
Valor Life Benefits offers indexed universal life to residents of Texas, Colorado, South Carolina and Michigan. People who choose IUL usually want permanent coverage plus room to pay more in some years and less in others. Ask for an illustration at the policy's minimum interest rates as well as the illustrated rate, look at how many years the coverage lasts at the minimum rates, and check the surrender charge schedule for the early years.
Some IUL policies include a no-lapse rider that keeps the death benefit in force if a set minimum premium is paid by each due date, even when the account value would otherwise run out.
Indexed Universal Life Questions
How does indexed universal life work?
Each premium goes into the policy's cash value. The company takes out the monthly insurance charges and expenses, and the rest earns interest. In the indexed account, that interest is tied to the change in a stock market index, using the participation rate and limited by the rate cap and floor set in the contract.
Does universal life insurance have cash value?
Yes. Universal life builds an account value from premiums minus insurance charges and expenses, plus interest. The owner can borrow against it or make withdrawals, and if the account runs down to zero the policy can lapse.
How does universal life insurance work?
Universal life is permanent coverage with flexible premiums. You can pay more or less within limits and change the death benefit at certain times. Each month the company takes the insurance charge from the cash value; if premiums are lower than the charges, the difference comes out of the cash value. Coverage lasts to the maturity date, usually age 95 or 100, as long as the cash value stays above zero.
How does life insurance lapse?
A policy lapses when premiums go unpaid past the grace period, which is 31 days on most policies. On universal life it can also lapse when the cash value is used up by monthly charges or loans. A lapsed policy that is later reinstated starts a new contestable period.
How does life insurance accumulate cash value?
A portion of each premium is credited to the cash value. On whole life it grows at a rate set in the contract. On universal life it grows at a declared rate with a minimum, and on indexed universal life at a rate tied to an index within a cap and floor. Growth is tax-deferred while it stays in the policy.