Indexing

Equity-indexed universal life insurance, or indexed universal life insurance (IUL), is permanent life insurance that offers all the benefits of universal life with accumulation values tied to a stock market index. An EIUL policy has a fixed interest rate component as well as an indexed account option. Whereas traditional UL may credit 4 percent to 6 percent, EIUL has the ability to receive index-linked gains as high as 18 percent or more. In years in which the index does well, interest-crediting rates will rise, and in years in which the index performs poorly, interest crediting will fall. The policy owner can reap the rewards of stock market-type gains and be protected with minimum-guaranteed interest rates in case of stock-market losses. EIUL otherwise has all of the typical features of traditional UL and operates under the same policy mechanics.

The major difference with EIUL is the option to participate indirectly in the upward movement of a stock index without accepting the normal risk associated with investing in the stock market. The actual interest credited to a policy’s cash value is determined by the changes of an equities index. Most insurance companies use the S&P 500 Index as the underlying index for their EIUL product. This combination of the potential to realize higher upside returns without the downside risk makes the EIUL policy a unique and attractive cash-accumulation vehicle.

This product has seen increased sales and an increased number of companies offering it. While many variable universal life policies recorded big losses in the stock-market drop in 2000 and after, EIUL owners recorded no losses or even small gains. In addition, while the low interest-rate environment hurt returns on fixed UL policies, EIUL policies were crediting higher returns due to their links to stock-market indexes.