What is Universal Life Insurance?
A type of permanent life insurance. Under the terms of the policy, the excess of premium payments above the current cost of insurance is credited to the cash value of the policy. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, as well as any other policy charges and fees which are drawn from the cash value, even if no premium payment is made that month. Interest credited to the account is determined by the insurer, but cannot lose value. When an earnings rate is pegged to a financial index such as a stock, bond or other interest rate index, the policy is a "Equity Indexed Universal Life" contract.
Universal life insurance (UL) comes in a lot of different flavors, from fixed rate models to variable ones, where you select various equity accounts to invest in. Indexed universal life (IUL) allows the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P 500 or the Nasdaq 100. IUL policies are more volatile than fixed ULs, but less risky than variable universal life policies because no money is actually invested in equity positions.
IUL policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit. People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs as key person insurance for business owners, premium financing plans or estate-planning vehicles. IULs are considered advanced life insurance products in that they can be difficult to adequately explain and understand.
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