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Indexed Universal Life Insurance: A Love Affair for Consumers

 
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Consumers continue to show strong interest in indexed universal life insurance (IUL), a type of permanent life insurance that allows policyholders to accumulate cash value based on the performance of a stock market index.

Description: A couple sitting at a table with a financial advisor, looking at paperwork and discussing insurance policies.

Indexed universal life insurance, or IUL, has been gaining popularity in recent years. This type of permanent life insurance allows policyholders to accumulate cash value based on the performance of a stock market index, such as the S&P 500. IUL policies offer the potential for higher returns than traditional whole life insurance policies, but with less risk than variable universal life insurance (VUL) policies.

Generally, when utilizing either whole life or IUL to accumulate money, the overall strategy is the same. The minimum amount of life insurance is purchased, with the remainder of the premium going into a separate account that earns interest or is invested in stocks, bonds, or other securities.

Consumers love indexed universal life, a love affair that remained strong in the fourth quarter 2022, according to Wink's Sales & Market Report. IUL premiums increased 14.1% in the fourth quarter of 2022, compared to the same period in the previous year.

Despite its popularity, IUL policies have been subject to increased scrutiny in recent years. In 2020, the National Association of Insurance Commissioners (NAIC) adopted Actuarial Guideline 49-A (AG 49-A), which imposes new requirements on how IUL policies are illustrated to consumers.

The A Committee's IUL Indexed Universal Life (IUL) Illustration (A) was recently updated to comply with AG 49-A. The new requirements to AG 49-A apply to IUL policies “sold” on or after December 14, 2020.

Many fixed indexed annuity (FIA) and indexed universal life (IUL) policies include provisions that allow the insurer to cease crediting interest or index credits. These provisions are often referred to as “change in interest rate” or “change in index” provisions.

Ann Young Black, a financial planner, warns consumers to be aware of these provisions before purchasing an IUL policy. If the insurer decides to stop crediting interest or index credits, it can significantly impact the policy’s performance.

The choice recommended by financial advisor Andrew is an Indexed Universal Life Insurance Policy (IUL). Andrew calls these favored policies 'IUL LASER Funds', which stands for Liquidity, Access, Safety, Equity, and Returns. According to Andrew, IUL LASER Funds offer the best combination of safety, liquidity, and returns.

When someone purchases an IUL, they are not investing in the underlying indexes. They do not receive the dividends or interest of the underlying stocks. Instead, IUL policies credit interest based on the performance of the index, subject to caps and floors.

Indexed universal life insurance is a type of so-called permanent life insurance: In addition to your loved ones getting a death benefit when you pass away, a portion of your premium payments are invested in the stock market. This means that the policy can accumulate cash value over time, which can be used for retirement or other expenses.

“I am projecting total 2022 IUL sales to be more than $2.7 billion in target,” Moore said. “This will be significantly greater than the last year's total sales of $2.2 billion.”

In many ways, indexed universal life insurance and variable universal life insurance (VUL) are similar. Both types of policies offer the potential for higher returns than traditional whole life insurance policies. However, VUL takes what IUL can do and adds the ability to invest directly into the stock market, which can lead to higher returns but also comes with more risk.

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