Choosing what type of life insurance policy you want to buy isn’t easy – especially now that you have more options than ever.
The fastest-growing type of life insurance is known as indexed universal life (IUL). Sales of IUL policies climbed 39 percent in the third quarter of 2012, according to LIMRA, a marketing and research group for the life insurance industry.
Indexed universal life is a variation on one of the three main kinds of life insurance – term life, whole life and universal life. Unlike term life, IUL builds up a cash value; unlike whole life and universal life, it offers a variable investment return tied to a market index.
IUL offers a chance for higher returns than traditional universal life. With IUL, the cash balance earns a flexible return. The return varies based on performance of an investment index. One such index, for example, is the S&P 500 stock index, says Steven Brostoff, a spokesman for the American Council of Life Insurers, a trade group for the life insurance industry. This potentially offers a policyholder higher investment returns than could be expected with a conventional universal life policy.
By offering returns connected to market performance rather than guaranteed levels that already are set, IUL resembles an older kind of life insurance. Variable universal life insurance, which was popular in the 1990s, also paid returns based on market performance.
However, there is one important difference. Unlike a traditional variable product, if the index that’s being measured goes down, the investment return the policyholder earns on the cash value won’t decline as much, Brostoff says. IUL typically offers a minimum guaranteed return of 2 percent to 4 percent.
The guarantee comes at a price, however, in the form of a ceiling on the return. Many policies have caps from 12 percent to 17 percent, meaning that the policyholder’s annual return can’t be higher, even if the index goes higher.
Also, if the index rises less than the cap, the policyholder won’t receive all the positive gain. Different policies figure this cap for the potential investment gain in different ways, Brostoff says.
The rise of indexed universal life
IUL became popular starting in the early 2000s, following a drop in the stock market. More recently, low interest rates have helped generate interest in IUL. The combination of low interest rates and investor uncertainty about the stock market has helped sharpen IUL’s appeal, says Jason Wellman, senior vice president and national sales manager at Allianz Life.
IUL buyers are younger than typical life insurance customers, and the premiums they pay are higher. Citing figures from a report by AnnuitySpecs.com, Wellman says the average age of an IUL buyer is 38 and the average annual premium is $8,700.
IUL premiums often are paid in a lump sum, especially when purchased by older people. Paying a premium all at once rather than monthly can give a policyholder a bigger death benefit for the same amount of money.
When you buy an IUL, you often can buy riders, or add-ons, that provide extra benefits, such as coverage for long-term care.
The flexibility of IUL means it’s more complex than other types of life insurance. California insurance broker Alan Canton says that’s one reason why he doesn’t often recommend it.
“(There are) too many ways for the consumer and his or her agent to be wrong,” Canton says.
For instance, if the index linked to the policy goes down, the investment return may be lower than what would have been gained a fixed-return policy, he says.
Still, that doesn’t mean IUL isn’t worth considering.
“The product is very useful for people who are seeking and expecting better returns in their cash value than they’d ordinarily get with traditional universal life,” Canton says. “The potential is there for an upside with very little or no downside loss.”