What indexed universal life (iul) insurance covers

The owner chooses a level death benefit, where the face amount stays fixed and the cash value grows inside it, or an increasing benefit, where the beneficiaries receive the face amount plus the cash value. The increasing option costs more each month because the amount at risk to the carrier does not shrink as cash value grows; the level option is cheaper and is usually switched to once accumulation is the goal. The policy has to keep a minimum gap between cash value and death benefit under the tax code to remain life insurance, and the carrier raises the benefit automatically if the cash value gets too close.

A crediting method defines the period, usually a year, and how the index change is measured, point to point or averaged. The cap is the most the account can be credited in the period regardless of the index; the participation rate is the share of the index gain that counts; the floor is the least it can be credited, commonly zero. Some designs offer an uncapped strategy with a lower participation rate or a spread deducted from the gain, and some charge a fee for a higher cap. The strategies can be mixed and changed each year, and the carrier can reset caps and participation rates on existing policies, which the guaranteed minimum column of the illustration assumes it does.

Every month the carrier deducts a premium load on money coming in, a per-thousand charge on the face amount for the first years, a flat administrative fee, and the cost of insurance, which is the mortality charge on the difference between the death benefit and the cash value at your current age. That last item climbs steeply past the mid-sixties. Illustrations show the current charges and the maximum charges the contract allows; the carrier can move toward the maximum, and the cash value has to be able to survive that.

The cash value can be withdrawn up to the premiums paid without tax, and borrowed beyond that. A standard loan charges interest and moves the borrowed amount to a fixed account; a participating or indexed loan leaves the money in the index strategy while charging interest, which can win or lose depending on the year. Loans reduce the death benefit and, if they compound faster than the account, can collapse the policy and trigger tax on the gain. This mechanism is the basis of the retirement income designs the product is sold for, and it works only if the policy has been funded heavily for many years.

A surrender charge applies if the policy is cancelled or the face amount reduced in the early years, often for more than a decade, and it can take the whole cash value in the first few years. Some contracts offer a no-lapse guarantee that keeps the policy in force to a stated age as long as a set premium is paid on time, regardless of the account; it is worth having, and it is usually lost the moment a premium is missed or a loan is taken.