Indexed Universal Life Insurance (IUL) is a type of permanent life insurance that combines a death benefit with a cash value component. The cash value grows based on the performance of a chosen stock market index, such as the S&P 500, but does not directly invest in the market. This offers potential for higher returns while protecting against market losses through guaranteed minimum interest rates (“floors”) and capped maximum rates (“caps”) 145.
Key Features
- Lifetime Coverage: Provides protection as long as premiums are paid.
- Cash Value Growth: Linked to market indices with downside protection.
- Flexible Premiums and Benefits: Adjust payments and death benefits as needed.
- Tax Advantages: Tax-deferred growth and tax-free loans or withdrawals
How does the interest rate guarantee work in indexed universal life insurance
In Indexed Universal Life (IUL) insurance, the interest rate guarantee ensures that the policy’s cash value will not decrease due to negative market performance. This is achieved through a floor rate, typically set at 0%, meaning no negative returns are credited even if the linked index performs poorly. While the floor protects against losses, the policy also includes a cap rate, which limits the maximum return, often ranging from 8% to 12%. This mechanism provides a balance of growth potential and downside protection, making IUL less risky than direct market investments.