For most people, life insurance is all about protecting your loved ones financially when the worst happens. However, while that kind of peace of mind is valuable, you can get a lot more out of your life insurance coverage if you choose the right plan. Indexed universal life insurance offers more flexibility, particularly when talking about growing and maintaining cash value.
So, with that in mind, we want to take a closer look at what indexed universal life insurance entails, as well as showcase the top companies offering it.
What is Indexed Universal Life Insurance?
Typically speaking, the two options for life insurance are term and whole. The former covers you for a specific period (i.e., 20 years), while the latter provides benefits forever, as long as you make payments on time.
Universal life insurance, however, is a form of whole life that offers the ability to grow cash value by investing part of your equity. Even better, you have much more flexibility with how much you pay in premiums, when you pay, and how much your death benefit is.
For example, many individuals want extra coverage while they are parents, just in case something happens, and their spouse is faced with the financial burden. However, once your children are grown and independent, you can reduce your coverage and borrow the cash value you’ve accrued so far.
With universal life insurance, you can either let your money grow interest, or you can invest it. Indexed universal life insurance enables you to put some of your funds into an equity index, such as the S&P 500 or the Nasdaq 100.
What’s great about this policy is that you can earn money when the market is doing well, but you’re not putting anything at risk. The life insurance company can’t deduct funds from your account at any point.
By comparison, variable universal life insurance comes with inherent risk. Your cash value can decrease during market swings, but you earn a higher percentage when it’s on an upswing. For the most part, unless you are really trying to invest with your life insurance, indexed policies are better than variable.
Benefits and Downsides of Indexed Universal Life Insurance
When comparing plans, it’s crucial to understand all of the various elements before making a decision. Here are the top reasons to get this policy, as well as a few potential drawbacks. Indexed universal life insurance isn’t for everyone, so keep that in mind.
- Flexible Premium Payments – the way your cash value works is that a minimum amount is used to pay for your coverage, with the remainder going into your account. So, if the maintenance costs and fees are $50 per month, and you spend $100, the extra $50 will go toward your cash value.
- Earn Interest – if the indexes you’ve chosen (i.e., the S&P 500) does well, you get added interest to your balance. Best of all, this money is tax-deferred, so you only pay taxes when you withdraw it. If the market does poorly, your fund isn’t affected.
- Increase or Decrease Your Death Benefit – there is a guaranteed minimum death benefit, but you can add the cash value to raise it or withdraw money as you see fit. Since your premium costs are based on the benefit, you can lower your monthly payments.
- Borrow Money Without Penalty – usually, with whole life insurance, you will get penalized if you take funds out before a certain age. Some situations negate these penalties (i.e., illness), but usually, you’ll have to pay interest back into your account. With universal insurance, you can borrow at any time with impunity.
- Better Investment Option – there is no limit to how much you can put into your cash value (but there could be tax consequences). If you’re looking for an alternative investment account, your life insurance could be a good idea.
Disadvantages of Indexed Universal Life Insurance
For the most part, if you’re not able to put money away, this policy isn’t going to benefit you. Unlike whole life insurance that builds cash value no matter what, you have to put the money in as an investment. For example, if you only pay the minimum to cover costs and fees, you won’t have any cash value to grow.
Another disadvantage of indexed policies is that growth is tied to the market. While these plans are better than variable life insurance, your cash value can stall during a downturn or recession. As far as investments go, it’s not as great as some other options.
Best Companies for Indexed Universal Life Insurance
Now that you know what to look for, let’s compare the top insurance companies that offer this kind of coverage.
AM Best Rating: A+
Comdex Rating: 94
AM Best Rating: A+
Comdex Rating: 92
AM Best Rating: A+
Comdex Rating: 92
AM Best Rating: A+
Comdex Rating: 90
AM Best Rating: A+
Comdex Rating: 90
As you can see, each of these companies is highly rated. AM Best is the most trusted resource for reviewing and ranking life insurance companies. The organization looks at a variety of variables to assess how well a company can fulfill its financial obligations. The top rating possible is A++, which is incredibly hard to achieve.
The Comdex rating is an aggregate of rankings across different organizations. The best Comdex ranking is 100, so the closest a company can get to that number, the better it’s rated across the board.
Based on these numbers, we can see that TransAmerica is the top pick overall as an insurance company. However, to better understand what you can expect from an indexed universal life insurance policy, let’s break down what each of these companies offers.
What Sets These Insurers Apart
We’ve already discussed the benefits of an indexed plan, but there are different advantages based on the company you choose. Fortunately, most of the ones we’ve listed come with these added benefits, so you can feel even more confident when choosing a policy.
As we mentioned, indexed universal insurance takes any remaining balance after costs and fees and puts that money into your cash value fund. So, you want to choose a plan that has the lowest expenses, so more of your premium goes to the fund. All of these companies are on the low end of the spectrum, making them a good investment option.
Because your cash value fund is tied to the performance of a particular index (or indexes if you choose more than one), each insurer enforces caps on interest. On the low end, the cap can be as little as seven percent. This means that if the index outperforms that number, you don’t get any additional money.
The highest we’ve seen is 16 percent, but the average seems to be 12 percent. Each of these insurance companies has at least a 12-percent index cap, so your money can go further.
If you’re not familiar with this term, money sweeping refers to when your premium payment goes into your cash value. Realistically, the sooner, the better so that it can start working for you immediately. The best option is a daily money sweep so that you never have to wait more than 24 hours to grow your fund.
Unfortunately, most companies offer weekly or monthly sweeps, so you will want to time your payments around that. North American, however, does provide daily sweeping, so if you want more flexibility, we highly recommend them.
Chronic Illness Rider
Getting sick can be monumentally expensive if you don’t have the right insurance. Even those with adequate healthcare can wind up with massive costs over time. Debilitating diseases like cancer or leukemia can be devastating if you’re not prepared.
Fortunately, many life insurance policies allow you to start claiming a portion of your death benefit if you’re suffering from a disease. All of the companies we’ve listed will enable you to add this rider to your plan, adding further peace of mind for you and your family.
Fixed and Variable Loans
As we mentioned, one of the advantages of an indexed policy is that you can borrow against the cash value whenever necessary. However, some insurers only have one type of loan.
Fixed loans mean that the money you’re borrowing against won’t accrue any interest until you’ve repaid the loan. Variable loans, however, are still tied to the index, so you can continue your investment, even while borrowing against it.
Since you never know when you’ll have to borrow money or for what purpose, it’s best to have built-in flexibility. These companies offer both loan types so that you can choose based on your situation.
Another benefit of these insurers is that they have low variable interest rate caps. The average is six percent, which means that you’ll never pay more than that when putting money back into your account. Ideally, you’ll want as low a percentage as possible, so be sure to compare rates among plans.
Indexed Interest Bonus
Since earning money with your cash value is the primary reason to get an indexed policy, anything that can accelerate that growth is valuable. These insurance companies offer an additional bonus after 11 years, and it can be as much as one percent. Simply put, you’re being rewarded for keeping your money in the account for the long term.
Even better, North American offers this bonus on funds borrowed as well. So, if you have to take a loan out for any reason, you don’t lose out on this benefit.
Is Indexed Universal Life Insurance Right for Me?
We’ve covered a lot of benefits that can come with this kind of coverage, so it can seem quite appealing at first. However, as we’ve mentioned, indexed life insurance isn’t for everyone, so you want to consider the possibilities before making a final decision.
Here are the factors to think about when choosing the right plan for you and your loved ones.
How Much Can I Contribute?
Realistically, you don’t want your life insurance plan to be your primary source of retirement income. While the policies do offer flexible loan options, it’s typically better to put money in a 401(k) or IRA for long-term growth.
What that means is you should have other investments first, and any additional money can go to your indexed plan. If you don’t think that you’ll have much left over, then this insurance probably won’t be ideal for your situation.
Do I Want to Stop Premiums Eventually?
One of the benefits of universal life insurance is that you can use the cash value (and its interest) to make premium payments. So, if the idea of having guaranteed coverage without having to pay for it sounds appealing, this plan might be useful. What makes it better than whole life insurance is that the interest can keep the cash value solvent, allowing you to avoid payments for longer.
Will I Need to Borrow Before Retirement?
Major life expenses can come out of nowhere. Whether it’s a new house, a college education, or a trip to the emergency room, you never know what can happen.
However, if you’re planning on using your life insurance as a rainy day fund, you need to make sure that you won’t lapse coverage while borrowing against it. Again, this will come down to how much you can contribute. If it’s not that much, you may be better off with whole life insurance instead.
Contact NextGen Life Insurance Today
Comparing plans and rates is easy when you let us take care of the details for you. Simply tell us what your needs are, and we’ll look at the top policies. Contact us today to find out more and see which company is best for your indexed universal life insurance policy.