Understanding Equity Indexed Universal Life Insurance

Equity indexed universal life insurance is similar to a regular universal life policy. However, there are some features not found in a traditional universal policy.

Understanding Equity Indexed Universal Life Insurance

Universal life insurance policies come in a variety of forms. You can find everything from a basic fixed rate type of policy to variable rate types where you can select from a variety of equity accounts to invest in.

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An indexed policy gives you the opportunity to allot your cash value funds to either a fixed account or an equity index account. You can choose from popular indexes, like the S&P 500 or Nasdaq 100.

With an equity indexed policy, you can also decide what percentage of the funds you would like allotted to indexed and fixed accounts.

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These types of policies generally guarantee the principle amount of the indexed portion, but put a cap on how much you can earn.

Hybrid Life Insurance

Equity indexed policies are considered the hybrids of universal policies because they combine the best parts of a whole life policy and variable policies. The premiums are usually quite affordable, due to the lack of management, and are much safer than the variable type.

However, the potential return on a variable policy is much higher.

The benefits of an equity indexed universal life insurance policy:

  • You earn credited interest rates higher than what traditional policies pay, and you are not subject to unnecessary risks. You get the cash value element, but you have the option to indirectly participate in the benefits of investing in the stock index without the risks involved with playing the stock market. Interest earned on the cash values increases with the annual upward movements of a stock index. This does not include the dividends.
  • Death benefits are not taxable.
  • The tax free cash values keep growing.
  • There is potential for tax-managed earnings to pay for education or retirement.
  • The cash value can grow by as much as 10 to 14 percent annually. In the event the equity index is flat, the cash value will reach the minimum, which is usually guaranteed at 0 percent. Many insurance companies will offer you a guaranteed minimum interest rate for a certain length of time.
With all of these options and choices, you can see why an equity indexed policy is considered a very complex and sophisticated financial tool. It is much more than a simple life insurance policy.

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Before you buy this type of life insurance policy, make sure you completely understand all of the terms, conditions of the policy, potential tax consequences and anything else involved with owning this type of complicated policy.

Getting Rich With Life Insurance

The only way you can get rich with life insurance is if you are the beneficiary to a very large, multi-million dollar policy. Like mutual funds, an equity indexed universal life insurance policy can provide an little nest egg or retirement income, but it will never make you rich.

Sure, the 10 to 14 percent return sounds good. But, you only earn this return on the cash value amount. And these percentage estimates are on the high end. Many times your returns will be much lower.

Building your cash value to a sizeable amount takes many years. All of the premiums you pay do not go directly into your cash value account. First the mortality cost and the administration fees are deducted from your premiums. The amount that is left over goes towards your cash value.

According to some experts, an equity indexed universal life insurance policy is not for you if:

  1. You plan to have a net worth of less than half a million dollars
  2. You expect your income to take a nosedive after retirement
  3. You do not have any dependents
  4. You do not plan to have any dependents
  5. You do not plan to have assets worth protecting
If none of these instances apply to you, then you may want to take a closer look at what a permanent life insurance policy can do for you.

What Can Equity Indexed Universal Life Insurance Do For You?

There are two sides to permanent life insurance. The death benefit and the cash value portion.

The amount you can earn on the cash value portion has a top and a bottom. You can not earn more than the top percentage amount or earn less than the bottom guaranteed percentage. This gives you the comfort of knowing your cash value amount will rise slowly and steadily every year.

That is why it is best to leave the money alone and not make any premature withdrawals or to make any loans against the funds.

If you have a net worth of more than half a million dollars, then there is a good chance you will not need to make withdrawals or loans.

Also, if you do not need to supplement your retirement income with these funds, you will be able to provide better protection for your assets and leave more money to your beneficiaries. And isn't that the main reason for buying life insurance in the first place?

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With an equity indexed universal life insurance policy you can leave your beneficiaries a very large sum of money since they do not just get the death benefit, they also get all of the earnings built up in the cash value account.

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