Is Equity Indexed Universal Life Insurance Worth the Price?

Equity indexed universal life insurance is a type of insurance product that provides you with a death benefit as well as a cash value. The cash value of the policy is tied to the performance of an equity index such as the S&P 500. This type of insurance is being offered by many life insurance companies, and you may be unsure of whether to consider it. Here are the basics of equity indexed universal life insurance policies.

How It Works

This type of life insurance charges you a monthly premium, as other life insurance policies do. You can choose to pay the premium out of your own pocket, or you can choose to skip a payment. If you do not make the payment, the money for the cost of insurance is taken out of the cash value of the fund. This is a type of permit life insurance that is similar to whole life insurance. With whole life insurance, the insurance company manages the cash value for you and invests it. They give you a certain amount of return on your cash value. With equity indexed universal life insurance, your policy's cash value will be directly tied to the performance of a financial index. If the index performs well, the cash value of your insurance policy will be credited accordingly. At the same time, you have a level of protection, as the insurance company will generally have a minimum that you can earn even if the index performs poorly.

Caps

The basic idea behind this type of insurance policy sounds intriguing because you can benefit from movements in the market without taking on all of the risk. However, this type of insurance policy carries with it some caps on how much you can earn. Even if the financial index does very well, your account will likely be credited only with a maximum amount that is less than that. For example, if the financial index provides a 15 percent return over the course of a year, you might get only 7 percent credited to your cash value.

Participation Rates

Another potential drawback of this type of insurance is that many of the policies have participation rates. This means that your policy will participate in only a certain percentage of the returns of the index. For example, if you had a 50 percent participation rate, your account will be credited 5 percent if the index increased by 10 percent. This has the potential to lower your returns. 

Who Should Purchase

This type of life insurance can be beneficial for some, but it is definitely not for everyone. If you are interested in being able to take advantage of upswings in the market without taking on much risk, this product could be for you. However, if you are an active investor, you may be better off by purchasing a term insurance policy and using the difference to invest in the market yourself.

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