How IUL works
An IUL policy has two parts: a death benefit and a cash value account. You pay premiums, the insurer deducts the cost of insurance and policy charges, and the rest goes into the cash value.
The insurer credits interest to the cash value based on the performance of a market index, such as the S&P 500. You do not own shares in the index. The index is only used to work out how much interest is credited.
Caps, floors and participation rates
Cap
The most interest the policy will credit in a period, even if the index gains more.
Floor
The least it will credit, often 0%, so a falling index does not reduce your credited interest below that.
Participation rate
The share of the index's gain used in the calculation.
Charges
The cost of insurance and fees are deducted from the cash value, whatever the index does.
The insurer sets caps and participation rates and can change them within the limits stated in the policy.
What is flexible
- Premiums. Within limits, you can pay more or less from year to year.
- Death benefit. You can often adjust it as your needs change, sometimes with new underwriting.
- Access to cash value. Through loans and withdrawals, which reduce the death benefit and cash value.
What to watch for
- If you pay too little, or credited interest is lower than expected, the policy can run short and lapse unless you add money.
- Policy loans and withdrawals may cause a lapse and can have tax consequences that depend on your circumstances.
- Illustrations show what could happen under certain assumptions. They are not predictions or guarantees.
Good to know
Only values labeled "guaranteed" in the insurer's illustration are guaranteed. Life insurance is not an investment or a retirement plan, and Quotient does not provide legal, tax or investment advice.
Who it is a good fit for
IUL can suit people who want lifelong coverage, are comfortable with some uncertainty in how the cash value grows, and plan to fund the policy consistently over many years. If you want the simplest, lowest-cost protection, term life is usually the better starting point.
Frequently asked questions
Can I lose money in an IUL?
The floor protects credited interest from market losses, but policy charges are still deducted. If charges are higher than the interest credited, your cash value can go down.
Is IUL the same as investing in the stock market?
No. Your money is not invested in the index. The index is used only to calculate the interest the insurer credits, within the cap and floor.
How is IUL different from whole life?
Whole life has fixed premiums and guaranteed cash value growth. IUL has flexible premiums and growth that depends on an index, with fewer guarantees.
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