Which is better Indexed Universal Life or Universal Life?
Indexed Universal Life (IUL): more upside potential
An IUL can realize higher returns. Those returns are based on market performance with cap rates right now generally ranging from 11 to 13%. That’s the high end with a 0% floor, or point or two better, to protect against the downside losses. So between the cap and floor what will interest rate returns average? When shopping for coverage companies give percentage rates based on historical results over the last, 20 to 30 years or longer. It’s likely the typical agent will show them as high as the carrier will allow: 7% to lower 8% range. But, given caps rates are subject to change and market volatility, having an agent show a more conservative 5% to 6% rate of return is certainly in order.
Universal Life: steady
A universal life illustrations projections are based on current assumptions. The rate of return is in 3% to 5% range.
Cost of insurance are likely higher with an Indexed UL. Want to compare the two products apples-for-apples? Request an Indexed UL illustration and a UL illustration with the same premium at the same interest rate, using a low interest rate like 2%, then look how the returns chart out over the years to see which out performs the other.
Indexed Universal Life: higher maintenance to follow upside
Those who have no interest in following the stock market, in whether S & P 500 Index or another chosen index will go up, down or going sideways, or do not want to pay much attention to their life insurance policy, an Indexed UL is not the right product to buy. Indexed UL require decisions on the allocation of premium to the fixed or an indexed account. The floor of the indexed account may be 0%, or even 1% or 2%, but in a down market it’s better to have premium allocation to the fixed account to earn higher returns.
Universal Life: lower maintenance approach
It’s tempting but not wise to put a permanent life insurance policy in a drawer and forget about it. For any cash value life insurance, whole life with dividends or universal life, an annual review is advisable. Policy owners receive an annual statement, but the crucial elements of the policy values that an owner needs to track are often not given, or not readily identifiable or understood. Keep a copy of the policy illustration as issued and annually, or at least every few years, compare projected values, the original target value of the policy, to actual values. Better yet request an in force illustration to evaluate the policy’s current status and how it projects in a year by year chart. A policy owner is usually entitled to one a year.
Permanent life insurance should be tailored to the owner’s situation and goals. Age, gender, the amount of insurance, the individual’s health and level of engagement to the policy all count. I have recently looked for my clients at both Indexed UL and UL, and sometimes a UL fits better.
