The investment potential and flexibility of premiums offered by universal life insurance appealed to Steve. There are many different types of universal life insurance, from fixed-rate to variable. He is planning to buy Indexed Universal Life Insurance. Stick around to know more about Indexed Universal Life Insurance and how it works.
Let’s start. A portion of the premium goes towards the cost of the policy. The rest goes to its cash value after paying other fees. A cash value account can be allocated to an equity index account in indexed universal life insurance. Some indexes offered include the Nasdaq-100, the S&P 500, and more. An equity index provides interest on the cash value, but it isn't invested directly in the stock market.
While I have your attention, please hit that subscribe button and bell button to join our notification squad. Multiple indexes may be selected by the policyholder. A guaranteed minimum fixed interest rate is usually offered. The fixed and indexed accounts can be allocated to any percentage.
Each index is measured during the first month, and the value is compared at the end of the month. The interest is added to the cash value if the index increases during the month. It is credited monthly or annually to the policy. When the index gains 4% between September's beginning and September's end, the 4% is multiplied by the cash value. This amount is added to value.
Some policies take the average of the daily gains for a month, while others calculate the index gains as the sum of the changes for the period. In the event of a downturn, there is no interest crediting to the cash account. Upon indexing, the insurer credits the policy with gains based on a percent rate called the "participation rate”. It can range from 25% to 100%. For example, if the gain is 4%, the participation rate is 25%, and the current cash value total is $20,000, $200 is added to the cash value. That would be the gain multiplied by the participation rate multiplied by the current cash value.
Indexed Universal Life Insurance offers several advantages such as low premiums, cash value accumulation, flexibility. It is also less risky as it does not directly invest in the stock market. Its disadvantages include caps on accumulation percentage. This entails that some insurance companies cap their participation rates at a lower percentage than 100%. Indexed universal life policies have more advantages when they have larger face values. Policies with smaller face amounts are not as advantageous.
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--- VIDEO CONTENT ---
00:00 - INTRODUCTION
00:20 - DEFINITION
00:31 - CASH VALUE ACCOUNT
00:42 - EQUITY INDEX
01:00 - GAIN
01:20 - EXAMPLE
02:00 - ADVANTAGES & DISADVANTAGES