Overview of Equity Indexed Universal Life Insurance

Equity indexed universal life insurance (EIUL) is a permanent life insurance policy that, like the vast majority of permanent policies, provides a death benefit as well as a cash value component. 

However, this type of policy differs from other universal life policies because of the way the accumulation within the cash value account can be invested.

A New(er) Breed of Permanent Life Insurance 

Most consumers are aware of the two broad categories of life insurance: term insurance and permanent insurance.

A number of permanent life insurance options are available to consumers, and with so many choices on the market it can be difficult to determine which type of life insurance is best suited for one’s situation.

Permanent Life Insurance 

It is necessary to understand each policy’s benefits and limitations in order to make the best decision for an individual’s unique needs.

Here we discuss one of the more complex policies on the market today: equity indexed universal life insurance.

Fixed vs. Variable vs. Indexed

Unlike a traditional universal life policy, which is fixed in nature, an EIUL allows the policyholder to receive gains linked directly to a stock market index, for instance the S&P 500. 

On the other hand, in comparison to a variable life policy, an EIUL implores a minimum floor within the cash value account to safeguard the funds from loss as the market fluctuates. 

Put simply, policyholders of EIUL contracts are granted both the security that a fixed universal life policy provides, in addition to the growth potential and flexibility of a variable policy.

Crediting Indexed Gains

Although there are unique characteristics inherent to an EIUL that make it attractive to potential buyers, this type of insurance can get complicated quickly. 

In addition to putting some of the premiums into the fixed account of the policy, the policyholder has the option to select a percentage of the premium to go into the indexed portion of the cash value account.

Once funds are transferred into the indexed portion, an indexed account segment is created within the policy. 

Insurance companies vary as to when each indexed segment is credited to the policy. This can create confusion as to how much any specific policy is earning at any given time.

Maximum Cap – Minimum Floor

Additionally, a cap to earning within the indexed account is set by the insurance company. 

For example, if the index cap is 14%, and the index actually performs at 19%, the policy holder is credited only up to the cap of 14%. 

This allows the insurance company to gain on well performing market years, and subsequently provide the minimum floor, generally set at zero, to policyholders for the life of the policy. 

As with any insurance purchase, it is important to understand the unique aspects each type of policy can provide, as well as how those compare to similar products.

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