Indexed universal life insurance, explained without the illustration

At a glance

What it is

Universal life whose cash value credits interest linked to a market index, with a floor and a cap

Guarantees

Death benefit and a minimum credited rate (often 0%) are guaranteed; illustrated growth is not

Costs

Cost of insurance, policy charges and rider fees are deducted from cash value every month

Fit

People who need permanent coverage and have already funded retirement accounts

What indexed universal life is, in plain terms

Indexed universal life (IUL) is permanent life insurance with a flexible premium. Cash value earns interest credited by formula based on the performance of an index such as the S&P 500, subject to a floor (often 0 percent) and a cap or participation rate the insurer can change. Your money is not invested in the index; the insurer credits interest based on it.

Policy charges come out every month whether or not interest is credited. In years the index is flat or down, cash value can fall. If it falls far enough, more premium is needed to keep the policy in force.

How to read an IUL illustration

Illustrations show a guaranteed column and a non-guaranteed column. The guaranteed column assumes the minimum credited rate and maximum charges; it is the only column the insurer must honor. Compare the illustrated rate to the cap: a 6 percent illustrated rate with a 9 percent cap assumes strong index years most of the time. Ask what happens at 4 percent and at 0 percent, and how long the policy stays in force under each.

Questions to settle before buying IUL

• Do I need permanent coverage, or is this a retirement-savings decision dressed as insurance?
• Have I already maxed employer retirement plans and an IRA?
• What are the surrender charges and for how many years?
• Can the insurer change the cap, participation rate or charges after issue? (Usually yes)
• Who has reviewed this illustration besides the person selling it?