What Is Equity-Indexed Universal Life Insurance?

Jul 19, 2022 By Susan Kelly

Equity-indexed universal life insurance, as with all universal life insurances, accumulates cash value which the insured can use to borrow against, invest and then use to cover the increase in insurance costs which could eliminate premiums if the cash value exceeds inflation in the cost of insurance.

Understanding EIUL

Contrary to variable universal life insurance, which permits policyholders to put part of the entire value in different stocks and funds that have different risk profiles, equity-indexed universal insurance gives policyholders the option to deposit the cash value into an account that is indexed to the equity that pays interest based on an index of the market without investing the funds into the marketplace. If the market index of interest increases, the tax-deferred value of the insurance increases depending on the percentage of participation. In the example above, if the index rises by 5% and the participants are at 50%, the cash value would increase by 2.5 percent or 50 percent of the 5%.

Policyholders are not required to select one account where they can put the cash value accumulation. They can allocate the funds to various accounts that connect returns to various indexes or an interest rate fixed according to a percentage of their choice. Like any universal life insurance policy in the market, the insurance company keeps any cash value remaining for it and then pays solely the death benefits on the loss or demise of the person insured.

Pros and Cons

The equity-indexed universal life insurance policy provides some of the advantages of universal life insurance that is variable without the danger of holding positions in the market. If, for instance, the market goes down, the value of cash in an equity-indexed universal policy will not fall in tandem. It's just not going to rise. The cash value of the policy could decrease if premium payments exceed interest. However, there is a chance that participation rates (the proportion of market gains that the value of cash rises) typically is less than 100%, implying that cash value is likely to grow slower than the market overall.

Additionally, equity-indexed universal life insurance policies are a type of advanced life insurance. It is an intricate life insurance vehicle that is difficult to understand or explain. Investors must consider their specific needs and insurability when deciding whether or not to purchase equity-indexed insurance. Suppose you're considering an equity-indexed universal insurance policy to invest in. In that case, it is still essential to thoroughly study any company you are considering to obtain the most effective universal life insurance plan currently available.

EIUL Policy Long-Term Success

Purchase an EIUL policy intended to accumulate substantial cash values to be used for the retirement of the policy owner. The policy's purchaser must have a fairly lengthy 15 years or more period. If the policy is intended to help with estate planning, this time frame could be as long as 30 years, depending upon the person insured's age and health.

One reason why having a long time frame is vital is related to the cost of the policy. In most EIUL policies, the costs will be "front-loaded," which means they tend to be higher initially but generally lower later. If orthopedic surgeons use the EIUL plan as a long-term investment and keep it for a long time past the surrender time, the policy has effectively amortized the initial costs over time. It won't be penalized when they decide to surrender the policy in the future.

Beyond the initial cost, taxes are a major reason to ensure that the policies remain in place for longer. This is especially the case for orthopedic surgeons who use such policies to supplement retirement income, as the tax advantages provided by policies (tax-free increase within the plan and access to tax-free basis withdrawals as well as policy loans) will only increase in value when the growth of the policy increases over time. Similar to the Roth personal retirement accounts, it is a simple mathematical rule that says the longer you can enjoy tax-free access and growth, the more beneficial it is.

Proper Design of Policy Upfront

The proper design of a life insurance policy requires effective communication between the policy buyer and the insurance company. The agent must know if the customer is buying the policy to benefit from death funds to safeguard the family or from an income retirement plan. When the agent knows this policy's goal, she can make it a good plan.

For instance, to accumulate cash value to retire, the agent must design the policy to reduce the death benefit for any amount of premium within the tax rules since lower death benefits will result in lower insurance costs. The policy should also be designed, by tax rules, to minimize the death benefit over time, and should be designed to achieve this at the very beginning.

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