Equity indexed Universal life insurance
What is Equity Indexed Universal Life Insurance
Equity Indexed Universal Life insurance, or EIUL, is a Permanent Life Insurance Contract with it’s Cash Values Credited Based On the Performance of an Underlying Stock Index with Downside Protection.
How Does Equity Indexed Universal Life Insurance Work?
Like straight universal life insurance, the cash value of Equity Indexed Universal Life Insurance is invested by the insurance company in its general account, where it earns interest. Instead of the insurance company crediting the cash value of the policy with what the general account earns, the insurance company instead uses those proceeds to buy contracts on an underlying index, allowing for the potential for higher gains than fixed universal life insurance without the downside risk present in a VUL contract.
Equity Indexed Life Insurance compared to Variable Life Insurance
Equity indexed universal life insurance (EIUL) is a type of permanent life insurance that provides coverage for the rest of your life. It is similar to variable universal life insurance (VUL), in that both products’ cash value is based on “market returns”; however, there are some key differences between EIUL and VUL.
With VUL, the amount of money you earn on your investments depends on the direct
performance of the underlying investments without any limits.
If the market performs well, you can make a lot of money. However, if the market performs poorly, you can lose money.
With EIUL, your earnings are linked to the performance of an equity index, such as the S&P 500, but not actually invested in the S&P 500 stock market. This means that you will earn a rate of return that is based on how that index performs, but you will not be susceptible to investment losses if it were to decline. This can provide you with some stability and protection against losses during tough times in the market.
Another difference between EIUL and VUL is that EIUL typically has lower fees than VUL. This can help you keep more of your money invested and allow it to grow over time.
Overall, EIUL and VUL are both good options for those looking for permanent life insurance coverage. However, EIUL may be a better choice for those who are looking for stability and protection against losses in the market.
Equity Indexed Universal Terms to Know When Comparing Contracts
There are several terms you will want to understand when reviewing a EIUL contract. These terms are:
- Floor – The floor is the minimum guaranteed interest rate the insurance company will pay on the policy’s cash value. This rate is typically set when the policy is issued and may change, but will likely never be below 0%. The floor is important because it protects the policyholder from having their cash value decline due to investment risk.
- Cap – The cap is the maximum amount an EIUL contract will credit the cash value during a specific time period, regardless of how high the attached index increases. This is important to understand, as it limits the cash value’s ability to accumulate.
- Participation – The participation is the percentage of the index return credited to the account. For example, if the contract states there will be 80% participation and the attached index earns 10%, then the contract will be credited 8% (or 80% of what the index earned)
- Spread – The amount subtracted from the amount credited. For example, if a contract has a “2-point spread” and the index returns 2%, no interest would be credited to the account. If the index return was 20%, the contract might receive an 18% interest credit (assuming 100% participation and no cap).
Who Buys Equity Indexed Universal Life Insurance?
An individual looking for long-term death benefit protection with the potential for a better return on their cash value accumulation, which is not what straight universal life insurance provides, while protecting their principal, may purchase an EIUL contract.
As a financial planning firm with a fiduciary responsibility to make recommendations that are in your best interest, Decision Tree Financial recommends you buy an equity indexed universal life insurance policy after going through our Wealth Performance and Protection System in order to see if an EIUL policy is your best solution.
