Posted on February 13, 2010.
The Equity Indexed Universal Life Insurance: the best of both worlds? Although equity indexed annuities have been around for a number of years, equity indexed universal life (EIUL) insurance is a newcomer to the market of life insurance. EIUL is a spin on universal life (UL) insurance, a kind of popular politics because you can raise or lower your death benefits according to your needs and your premiums may be adjusted accordingly. UL policies also build cash value against which you can borrow or even use it to pay your premiums.
Equity indexing concept is relatively simple: the amount of interest credited to the cash value of your policy is linked to the performance of a particular index (the S & P 500 is one of the most popular) , whereas in years when the index performs well your interest rate credit will increase, and in years when the index is malfunctioning, your interest rate credit in the fall.
Most policies guarantee that your rate of interest payment will never fall below zero so you will not lose money (you can not do). They also have a cap on how high rates of credits, they will pass to you. This range of possible rates is often described as offering "an upside potential with downside protection."
How does it work?
In general, the choice facing buyers of life insurance is whether to go with a "strong" universal life insurance that offers a minimum guaranteed rate, but limited potential for cash accumulation or go with a more "risk" variable life policy that offers better earning potential, but no protection against market losses.
EIUL insurance is an attempt to bridge the gap between these two approaches. EIUL is universal life insurance where the cash value is tied to a certain index. If the index is higher at the end of the year, your cash value can go up. If the index stays flat or falls, the value of your cash earns the minimum guaranteed interest rate (eg 2 percent). It should be noted, however, that when your index goes up does not mean that your cash value will increase to reflect the increase in the full index, due to fees and dividends and capital gains are not included in the calculation of the cash value.
But these new products the best of both worlds? Let's take a look at both sides of the coin.
Advantages and disadvantages
An advantage of EIUL is the potential for higher interest rates for the recognition of a traditional universal policy. Another advantage is that it offers greater protection against market downturns of a life insurance policy with variable capital.
Stephan Mitchell, analyst at competitive products, and Pacific Life Insurance Co., based in Newport Beach, Calif., said that if these products are not a panacea, they can provide "an attractive pattern for average buyers who saw the market downturn of 2001-2002 and the search for some safeguards. "These products can offer some peace of mind for buyers seeking a combination of guarantees and some potential for cash accumulation.
However, there may be disadvantages to having an equity indexed product. The main disadvantage of equity indexed product is that it has a slightly higher risk than traditional universal policy. In addition, the ceiling rate, the maximum you can earn limits upside potential compared to a policy variable and may be modified periodically by the insurance company.
Steven Weisbart, an economist at the Insurance Information Institute, also cautions that "the system of credit rates in these products is probably not familiar to prospective buyers and agents." Since there are so many "moving parts" to one of these products, it is sometimes difficult to understand what the product does at first sight.
insurance policies do EIUL fill a void between traditional bookends of modern insurance market, b.
