Indexed Universal Life Insurance
Financial options. Financially savvy people know that the key to having options is to start early and have a mix of short-term and long-term, and lower-risk and higher-risk tactics in their financial game plan.
Life insurance is, first and foremost, a way to help protect your assets by replacing the income that makes your family’s lifestyle possible if something happens to you. But it can also be one step toward helping secure the financial options you want.
Indexed universal life insurance is a long-term insurance tool that combines the end-of-life death benefit offered by permanent life insurance with potential for cash value growth linked to a stock market index. Indexed universal life may offer advantages for people who want a lower-risk choice for their cash value than variable universal life insurance, but with potentially higher returns than traditional universal life insurance.
How indexed life insurance works
To understand how indexed life insurance fits into the spectrum of life insurance available, it's helpful to understand some life insurance basics.
There are two main types of life insurance: term and permanent.
Term life insurance is underwritten for a specific period of time, typically from five to thirty years, and the premium will increase if the policy owner wants to keep the policy in force after the initial term period has ended.
Permanent life insurance can insure you for a lifetime1. The most common forms of permanent life insurance are whole life and universal life.
To help customers afford life insurance coverage later in life when the risk is higher, permanent life insurance policies have a generally income tax-deferred2 cash accumulation feature that’s not available in most term policies. A portion of your premium payment goes toward cash value that may grow over time.
This cash value is primarily intended to help you cover the future cost of the policy as the cost of insurance goes up with age. However, the cash value can be borrowed or taken out (surrendered)3 for any use, and the death benefit remains guaranteed according to the terms of the contract and provided that premiums are paid.
Whole life insurance generally has a level premium and guaranteed level death benefit, while universal life has additional features including flexible premiums4 and face amounts to meet your changing needs.
There are three main kinds of universal life insurance: traditional, variable, and indexed.
Traditional universal life is designed to help you meet your current and future life insurance needs as your life changes – through marriage, parenthood, job promotions, retirement and more. You decide when and how much premium to pay, within policy limits, allowing you to build cash value faster when you have funds available, or temporarily suspend premium payments if times are tight. The policy’s cash value is guaranteed to earn a minimum interest rate, and may earn a higher rate depending on the company’s investment returns.
Variable universal life insurance has the same flexibility as universal life, plus an investment feature. The investment feature typically allows you to allocate your cash value to a broad choice of market-based "subaccounts." Variable universal life has the most potential for gain of any of the universal choices, but the subaccounts are also vulnerable to market fluctuations – when the market goes down, so does the value of subaccounts invested in the market.
Indexed universal life provides you the opportunity to allocate your premium into accounts whose returns are linked to the performance of specific market indexes. This money is not invested directly into the market. Instead, the insurance company monitors the performance of the indexes and calculates a credit based on that index’s annual percentage change. This can lead to gains in the cash accumulation account if the indexes perform well.
But what if the index performs poorly? Luckily, indexed policies usually include features that shield policy owners from losses due to a market decline. In exchange for this protection, most indexed policies are also subject to a cap on gains. Most indexed life insurance policies also offer a fixed account that policy owners can choose, which is guaranteed to grow by at least a minimum interest rate regardless of market performance.
There’s a popular adage in the life insurance industry: the best time to have started preparing for the future was 20 years ago. The second-best time is today.
Maybe you’re balancing a mortgage, saving for your children’s education, and looking ahead to retirement. Because of its versatility and generally income tax-deferred growth, and generally income tax-free5 distributions and death benefits, indexed universal life can help meet the needs of customers like you and me – customers with families, who may have full-time jobs or own small businesses. Call me to talk about all of the ways Farmers Life can help you protect your financial assets and help secure your family’s financial future.
Your Farmers agent may only sell policies in states in which he or she is licensed.
Farmers New World Life Insurance Company is not licensed to sell life insurance, accident and health insurance, or annuities in the state of New York.
1Lifetime coverage is guaranteed as long as all premiums are paid to keep the policy in force.
2For informational purposes only. In general, partial withdrawals from a permanent life insurance policy in excess of the policy’s basis are taxable, and limited circumstances exist where death proceeds will be taxable. Neither Farmers New World Life Insurance Company, its employees nor its Agents provide legal or tax advice. Always consult your own attorney, accountant or tax adviser as to the legal, financial or tax consequences and advice on any particular transaction.
3Policy loans and withdrawals will reduce cash surrender value and death benefit. Policy loans are subject to interest charges. If your policy is a modified endowment contract, loans and withdrawals may be subject to taxes and penalties.
4This policy may lapse if premiums are not paid or if premiums are not sufficient to continue coverage.
5Distributions from a life insurance policy in the character of partial surrenders (withdrawals) up to basis or policy loans will generally be income tax free, provided the policy does not violate Modified Endowment Contract (MEC) guidelines and the policy is not terminated during the lifetime of the insured. MEC guidelines are rules in the Internal Revenue Code which specify maximum premiums that can be paid without triggering adverse tax consequences for withdrawals. A policy termination during the life of the insured can cause the owner a single taxable event for any gains in the policy that were borrowed or withdrawn on or before the termination date.