What’s the Difference Between Universal Life Insurance and Indexed Universal Life?

If you’ve recently been considering all of the types of life insurance that are available to you, you likely know about the difference between permanent life insurance and term life insurance. However, there are also multiple types of permanent life insurance, which include whole life insurance and universal life insurance.

If you’re interested in universal life insurance, it’s possible to apply for a standard UL policy or an indexed UL policy. Before applying, you should be aware of the subtle differences between these two policies.

What Is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance where you can get lifetime protection for the monthly premiums you pay. This protection comes with the ability to build cash value on your policy. A universal life policy will allow you to reduce or increase premiums depending on how much you’re able to pay.

However, universal life insurance has fewer guarantees than whole life insurance if your premium payments are low for a lengthy period of time. Cash value growth is at its highest when your premium payments are also high.

What Is Indexed Universal Life Insurance?

Indexed universal life insurance is another permanent policy that will build cash value over time. These policies provide cash value growth via an equity index account. Once enough cash value has been built up, it can be used to lower or pay the entirety of your premium without reducing your death benefit.

How These Two Forms of Insurance Differ

Indexed universal life insurance is very similar to the standard universal life policy. The main difference involves how the policies build cash value. With indexed universal life insurance, cash value allows growth to occur in a stock index, which is a grouping of different stocks. Universal life provides cash growth with non-equity earned rates.

When you obtain an indexed universal life policy, you can increase your cash value by placing a portion of it in an equity index account, the primary of which are NASDAQ and S&P 500. Instead of basing the cash growth on non-equity earned rates, equity index accounts grow based on how the entire market performs.

Keep in mind that your interest rates will still vary. All universal life policies come with a minimum interest rate that the policy will earn no matter how the market is performing. Some indexed universal life policies also have an interest rate cap, which limits how high-interest rates can be. Since the cash growth through an IUL policy can be more rewarding for you, these policies usually come with higher fees and premiums.

The Bottom Line

Before applying for one of these policies, make sure that you know how your insurance provider will calculate your earnings cap, interest rate, and any fees that you might owe. Now that you understand how universal life insurance differs from indexed universal life insurance, you should have the details to decide which policy works best for you.