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How Does Indexed Universal Life Insurance Work?

by Kimi

There are many types of permanent life insurance policies out there that offer lifetime coverage and a cash value growth component for wealth building. Many have heard of whole life insurance, but another great option is indexed universal life insurance. These policies offer more flexibility and potential cash value growth.

In fact, LIMRA found that indexed universal life insurance saw some of the most substantial growth of all permanent life insurance policies in 2022.

If you’re considering life insurance quotes, this article will explain how indexed universal life insurance works and dive into a few ways to see if it’s the right policy type for you.

How indexed universal life insurance policies work

Indexed universal life insurance is a permanent life insurance policy, so it lasts for a lifetime. Premiums and death benefits are adjustable. This type of policy also offers a cash value growth component. Part of each premium goes into this component, where it’s then invested into a market index and can grow tax-deferred. Once the cash value is large enough, you can borrow or withdraw from it. You can also pay premiums with it. If you surrender the policy, you can receive the cash value minus surrender charges.

Since the cash value is invested, there are more potential gains than the fixed interest rate of whole life or universal life insurance. However, insurers often cap your maximum gains, and you also risk losing money through market fluctuations.

How to decide if indexed universal life insurance is right for you

Considering several factors can help you decide if an indexed universal life policy is the best option for you:

1. Your budget

According to Forbes, indexed universal life insurance tends to be cheaper than whole life insurance. However, it still costs more than term life insurance. So, this policy can be a good option if you want to save money but still want coverage for life. Additionally, you can pay premiums with your cash value once it grows large enough.

2. Your coverage needs

Indexed universal life insurance offers lifetime coverage, so it can work well if you want the peace of mind that your coverage will never expire. Additionally, the flexible death benefit lets you adjust coverage as needed. You can lower your death benefit to cut premiums or increase your premiums to boost your death benefit.

3. Your financial goals and needs

Indexed universal life insurance offers the potential for more cash value growth since it invests in a market index. If you have larger financial goals or more complex needs, this additional growth potential could be more valuable than the low fixed rates offered with the cash value of other permanent life insurance policies. But keep in mind that you can experience losses if the market falls.

The bottom line

Indexed universal life insurance offers many valuable features that may make this policy a good fit for certain types of policyholders. If you want lifetime coverage with more flexibility than whole life insurance, an indexed universal life policy could work for you. It might also be a good option if you have complex financial needs and higher risk tolerance and want more potential cash value growth than other permanent life policies offer.

If you decide indexed universal life insurance is the right policy type, shop around with multiple insurers and talk to a qualified financial advisor. This allows you to compare quotes to get great rates on the coverage you need.

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