Equity indexed universal life allows the owner to allocate cash value amounts to either a fixed account or an equity index account. It allows policyholders to tie accumulation values to a stock market index.
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Cash, Flexibility And Safety Through Equity Index Universal Life
Equity indexed universal life may have lower guarantees than fixed universal life insurance, but less risky than variable universal life insurance because no money is actually invested in equity positions. Equity indexed universal life insurances offer tax-deferred cash accumulation for retirement while maintaining a death benefit.
Equity index universal life insurance policies typically guarantee the principal amount in the indexed portion, but limit the maximum return that a policy holder can receive in said account. Since these policies are seen as a “hybrid” universal life insurance policy, they are usually not very expensive, and are safer than an average variable universal life insurance policy.
People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use equity indexed universal life as key-person insurance for business owners, premium financing plans or estate-planning vehicles. Equity indexed universal life insurances are considered advanced life insurance products in that they can be difficult to adequately explain and understand.
How Does Universal Index Life Insurance Work?
When a premium is paid, a portion pays for annual renewable term insurance based on the life of the insured. Any fees are paid, and the rest is added to the cash value. The total amount of cash value is credited with interest based on increases in an equity index. Some policies allow the policyholder to select multiple indexes. Universal index life insurance usually offer a guaranteed minimum fixed interest rate and a choice of indexes. Policyholders can decide the percentage allocated to the fixed and indexed accounts.
The value of the selected index is recorded at the beginning of the month and compared to the value at the end of the month. If the index increases during the month, the interest is added to the cash value. The index gains are credited back to the policy either on a monthly or annual basis. The resulting interest is added to the cash value. Some policies calculate the index gains as the sum of the changes for the period. Other policies take an average of the daily gains for a month. If the index goes down instead of up, no interest is credited to the cash account. Equity indexed universal life policies typically credit the index interest to cash accumulations either once a year or once every five years.