Universal Life Was Introduced In The Early 1980' S

Whole life insurance has been around for over 150 years. Universal Life offered the ability to increase or decrease the premium and death benefit and credited the cash values each year with a current interest rate.

Universal life was introduced in the early 1980's. Variable life followed, which allowed policy owners to invest their cash values in equities. Now there is a new kid on the block: Indexed Universal Life. All three have their plusses and minuses. Here are the salient features: Indexed Universal Life( IUL) is similar to Universal Life( UL) ; premiums and death benefits are flexible. As your situation changes, you can decrease or increase( subject to insurability) the death benefit. You can increase or decrease premiums, or even stop them altogether.

IUL is similar to Variable Life( VL) or Variable Universal Life( VUL) as the cash value is based on the increases of one or more stock indexes. Indexed Universal Life policies do not invest directly in equities, so you do not have the same downside risk. The most common are the DJIA, NASDAQ 100 and the S& P 50 Variable Life contracts allow direct investment in equities, much like a mutual fund. The insurance company assumes all the risk. However, if the index goes down, your cash value either stays the same or is credited with a minimum guaranteed interest rate, i. e. 2% . If the index that you have chosen goes up over a given time frame( usually one year) , your cash value goes up. How cool is that?

However, if the market goes down, your account doesn' t go down. If the market goes up, you get to participate in the growth. It stays the same. Any gains are locked in. It gets even better. They can never be taken away due to future decreases in the market.

If the market goes up, you take a step up. It's like walking up a flight of stairs. If the market goes down, you stay where you are. Only a few companies offer this contract. Indexed Universal Life has only been around for a few years. However, since 2000 the annual growth rate for this type of policy has been 24% . Crediting options are the math behind how the insurance company determines how much to credit your cash value at the end of each crediting period.

When you speak with your life insurance agent about IUL, there are a few new terms you will need to understand: Crediting Options. The two most common are point to point and monthly average. This is normally one year, but could be 2 or 5 years, depending on your contract choice. Point to point looks at the value of the stock index you chose at the beginning of each contract year and compares it to the value at the end of the point- to- point period. Whatever happens in the interim doesn' t matter. On the other hand, you could end up with a healthy loss if the index takes a dive during the latter part of your term with what to a regular investor would be a gain for the year. You could have a very high growth rate if the market and the corresponding index have a growth spurt during the last few months of the term.

The monthly average method takes a reading of the index each month. This approach tends to smooth out the fluctuations. Then at the end of the year, adds them up and divides by twelve. Which one is better? Since a life insurance policy is a long- term proposition, in the real world both should end up about the same over an extended period of time. It depends on your tolerance for risk and how the market performs during your policy's time frame.

Participation Rate. It could be, for example, 55% , 80% , 100% or 135% . Participation rate is the percentage of the increase in the index credited to your Indexed Universal Life policy each year. Any given percentage rate is not necessarily better than another. Cap Rate. It is simply the insurance company's way of factoring in their downside risk and is a component that allows you to negate a cash value decrease if the market goes down. The cap rate is the maximum rate of return the insurance company will credit to your policy each year.

However, if the index increased 15% , your policy is credited with 12% , the cap. For example, if the cap rate is 12% and the index you chose went up 10% , your policy is credited with a 10% gain. Not all Indexed Universal Life contracts have a cap. Indexed Universal Life is an exciting new approach. Participation rates and cap rates work in conjunction with each other. If you are looking for a rate of return that is higher than traditional whole life or universal life, but don' t want the market risk of variable life, indexed universal life may be for you. The fact that the cash values are based on the performance of the equity market, coupled with the feature that prevents loses and locks in gains should be enough to warrant further exploration.