Indexed Universal Life, or IUL, insurance has become increasingly popular lately, and as its popularity has risen so too has the number of people who have an opinion about it. Insurance News Net reported in March of 2023 that “consumers love indexed universal life.” In 2022, IUL sales surged 10.9 percent totaling $2.7 billion worth of IUL policies purchased by American consumers.
So is this trend good? What exactly is an IUL policy? And could one be right for you? Initially, I was skeptical, but after I fully examined the pluses and minuses, I’ve come to think this type of insurance can be a great way for families to both protect their loved ones and grow their assets.
First of all, let’s start by discussing what “Indexed Universal Life” means.
Indexed refers to a stock index like the S&P 500. Does this mean if stocks go down and you hold an IUL policy that you will lose money? No. The fact that you’re protected from losing money when stocks go down is one of the key features of IUL insurance.
Universal is defined in the dictionary as “applicable in all cases,” and for purposes of IUL policies it means the policy is permanent, or applicable at every stage of your life. This is in contrast to a “term” policy, which only protects you for a certain number of years, say 10 years or 20 years.
Life refers to the life insurance component of the policy, or a benefit paid in the event of the policyholders’ death. Life insurance protects your loved ones if something unexpected should happen to you.
As the terms in its name indicate, Indexed Universal Life does several things at the same time. Two key aspects to understand are:
- The life insurance benefit begins immediately. If you purchase an IUL policy with a $200,000 death benefit, pay your first monthly premium, and then you get hit by a bus the next day, the benefit your loved ones will receive will be the full $200,000.
- An IUL policy builds wealth for you over time that you can borrow against, effectively allowing you to be your own bank. Your money grows more when the stock market goes up, but you don’t lose money when it goes down. The insurance company assumes this risk for you.
So what changed my own mind? I studied Finance in college, where much of the emphasis was on the stock market and also grew up with a father who enjoyed investing. It was hard for me to get my mind around the idea of an insurance policy that also incorporated a wealth building strategy tied to the stock market. A lot of people probably said similar things about smartphones at one time. How can a phone also be a computer?
Some financial professionals recommend instead of getting an IUL to simply buy a term policy and invest in the stock market separately. However, I disagree and I think an IUL is a smart way to allocate some of your portfolio, and I believe the graph below really makes the point on how valuable an IUL policy could end up being for you.
As you know, the stock market is volatile. Overall, stocks have tended to go up over time, but from year to year the fluctuations can be huge. In 2008 for example, the S&P 500 fell 48 percent in just six months. What if your money were invested directly in the S&P 500 the year you had hoped to retire? You’d have to drastically scale back the lifestyle you’d planned to enjoy in your senior years or just keep working until the market recovers. If the same money were in an IUL however, the S&P 500 could fall by half and you would lose nothing. You can confidently make plans and know that your money is there for you when you need it.
Could an IUL policy be for you? If you have loved ones you want to protect with life insurance and want wealth accumulation that protects you from losing money when the stock market goes down, then it just might be!
Eric Eisenhammer
Eric is an Asset Protection Specialist. He is co-founder of Legacy Defender Insurance Solutions and holds licenses in Life and Property & Casualty insurance. Eric earned a bachelor's in Finance from California State University, Northridge and a Master's in Public Policy and Administration from Sacramento State.
