Equity-Indexed Universal Life Insurance

Equity-indexed universal life insurance is a type of permanent life insurance policy that ties its accumulation to a stock market index.

Equity-indexed universal life insurance, like all universal life insurance, builds a cash value that the insured can borrow against, invest with and use to cover increases in the cost of insurance, potentially eliminating out-of-pocket premium payments should the cash value overtake increases in the costs of insurance.

Unlike variable universal life insurance, which allows policyholders to invest a portion of the cash value into a range of funds and stocks with various risk profiles, equity-indexed universal life insurance offers policyholders the opportunity to place the cash value in an equity index account, which pays interest according to a market index without actually investing the money in the market.

If the relevant market index increases, the tax-deferred cash value of the policy increases according to the participation rate. For example, if the market index increases by 5 percent and the participation rate is 50 percent. The cash value will increased by 2.5 percent, or 50 percent of 5 percent.

Policyholders need not choose one account in which to deposit the cash value accumulations. They may assign the money to several accounts, which tie returns to different indexes or to a fixed interest rate, in a proportion of their choosing.

As with all universal life policies, the insurance company collects any remaining cash value for itself and pays out only the death benefit upon the death of the insured.

Equity-indexed universal life insurance policies offer some of the benefits of variable universal life insurance without the risk of holding positions in the stock market. For example, if the market drops, the cash value of an equity-indexed universal life insurance policy won’t drop with it. It simply won’t rise. That said, the cash value of such a policy can decrease if premium payments outpace interest.

Equity-indexed universal life insurance policies are attractive because of their relatively low premiums, cash value that grows tax-deferred and permanent death benefits.

On the other hand, the participation rate, the percentage of market increases by which the cash value grows, is usually less than 100 percent, meaning that the cash value will grow more slowly than the market as a whole. Further, equity-indexed universal life insurance policies are a form of advanced life insurance, a complicated life-insurance vehicle that is difficult to explain or understand. Investors should refer to their unique needs and insurability when deciding whether to purchase an equity-indexed life insurance policy.