Three Things You Should Know About An Indexed Universal Life Insurance Policy

In the history of life insurance, indexed universal life (IUL) insurance is the new kid on the block. Because of this, you may not be familiar with it, but if you are shopping for life insurance, especially whole life insurance, you may want to consider it. Although a whole life insurance policy builds a cash value over time, an IUL policy has the potential to build a much greater cash value. There are a few important characteristics of an IUL policy that make it different from a whole life policy. The following are a few of them.

An IUL insurance policy usually provides a greater return than whole life insurance

With a traditional whole life policy, all the proceeds from the premiums are placed in a general fund that is managed and invested conservatively. The return on this policy is low, but it is steady and builds on a predetermined schedule. It is one of the safest ways to invest your money. However, if this low rate of return is a drawback for you, then an IUL policy may be a more attractive option. It still builds cash value but with the potential for a higher return because the interest on the cash value of the policy is based on a stock market index.

There are cap and par rates

The cap for an IUL policy means that you will have an upper limit to how great of a return you will realize on your policy. However, this is modified by your participation rate or par, as it is commonly abbreviated. If the index your policy is tied to increases beyond your cap, it is multiplied by the par rate, so you will earn a higher return than your cap but less than the index. This type of life insurance investment gives you a chance at a greater return than a traditional whole life policy but without the risk of investing in an index fund.

There are floor rates

This is the most your investments will lose in a given year. If, for example, a policy stipulates zero, then the most your insurance investments will lose for the year will be zero, which means you'll break even. The next year, everything resets, so you begin again. This feature protects the cash value of your policy.

If you are looking to buy a whole life insurance policy, you may want to consider an IUL policy as an alternative. Although they do not offer a guaranteed return like a traditional whole life policy, they do offer the potential to earn much more, while protecting the cash value of your policy on the downside. When you are looking at this type of policy, make sure you understand what the cap and par rates are, as well as the floor rates.

Contact a local company for more information about indexed universal life insurance.