Stock-Market Indexes and Smart Life Insurance Strategies

Life Events

Stock market indexes are a crucial part of the global monetary system, but do you know what they are or how they can affect your financial portfolio – or your life insurance?

At its most simple, a stock market is made up of investors who buy and sell stock in thousands of publicly traded companies. A company’s stock price goes up or down depending on how much investors are willing to pay for one piece of stock, called a share. Investors take gains or losses on their money depending on how well the stock performs each day.

Company stock is traded – bought and sold – on exchanges. There are hundreds of exchanges around the globe that range in size from The New York Stock Exchange, the world’s largest exchange trading more than 1800 companies’ stock each business day, to the fledgling exchanges that trade just one or two stocks in places like Cambodia, Cameroon and Laos.

Understanding Indexes

An index acts like a barometer of a certain subset of the stock market, making it easier to see how one set of stocks performs relative to another. Indexes don’t focus on any one company’s stock, which can fluctuate because of a company’s individual business circumstances (like a fire at a plant or changes in executive leadership) that may have little to do with the economic forces affecting a market sector. Instead, indexes represent a pool of stocks that generally includes companies having similar characteristics such as size, or the industry that the companies do business in – like oil and gas, automotive, or textiles and apparel – to name a few.

Two well-known stock indexes are the S&P 500®3, which follows the performance of 500 large-cap American companies, and the Russell 2000®4 Index, which follows 2,000 small-cap American companies.

While you can't invest directly in an index, various index-linked products are available. These are popular because risk is spread across all of the companies represented by the index and gains or losses reflect the combined movement of the index’s underlying stocks. This diversified approach can reduce risks over the long run.

Stock-Market Indexes and Life Insurance

One example of an indexed insurance product is indexed universal life insurance, a long-term financial tool that combines an end-of-life benefit with the potential for cash value growth linked to a stock market index.

With an indexed universal life policy, you may allocate your premium into accounts whose returns are linked to the performance of various stock market indexes. As with all universal life policies, charges for expenses and the costs of insurance are deducted from the policy’s account value monthly. Periodically, the insurance company calculates and adds a credit to the indexed account balance, based on the change in the value of an index during the period. This can lead to gains in the policy’s cash value when the indexes perform well.

But what if the index performs poorly? Luckily, indexed universal life policies usually include features that shield policy owners from losses if an index’s value declines. In exchange for this protection, most indexed policies are also subject to a cap on any gains.

Is an Indexed Universal Life Insurance Policy right for you?

An indexed universal life insurance policy may have advantages for people who want potentially higher returns for their universal life policy cash value than a fixed-interest-rate universal life policy might provide, but with less risk than a variable universal life policy.

If you’d like to learn more about how an indexed universal life insurance policy can fit into your financial plan, talk to a Farmers Insurance agent. Our knowledgeable agents can show you how life insurance may help you protect your assets and reach your financial goals.

The information contained in this page is provided for general informational purposes only. The information is provided by Farmers and while we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this article or the information, products, services or related graphics, if any, contained in this article for any purpose. The information is not meant as professional or expert advice, and any reliance you place on such information is therefore strictly at your own risk.

Life insurance, annuities and accidental death insurance issued by Farmers New World Life Insurance Company, 3003 77th Ave. SE, Mercer Island, WA 98040.

IC-0915-A         09/15