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Equity indexed universal life insurance: the best of both worlds?

Here are methods that may be used by EIUL policies to determine your cash value

  • Your insurance agent will show you illustrations of possible outcomes for your policy.
  • Caps: Your maximum annual increase.
  • Participation rate: If your index goes up 50 percent during the year, your cash value doesn't grow at the same rate. Instead, your account grows at a percentage of the index's performance, known as the participation rate.
  • Spreads or asset fees: A certain percentage deducted from the index's increase.

    Source: National Association for Indexed Products

If you like the idea of being able to adjust your premiums and life insurance benefit as your financial picture changes, you might consider universal life (UL) insurance, which provides more flexibility than traditional whole life insurance. In addition, like whole life, UL policies build up cash value over time that you can access.

If you also like the idea of benefitting when financial markets do well (as with a variable life policy), there's a product called equity indexed universal life (EIUL) insurance that does all of the above. With a EIUL policy, your cash value is tied to the performance of a certain financial index and rises and falls along with that index. Most policies will guarantee that if your index bombs your crediting rate won't go below zero.

On the other hand, EIUL policies also have a cap on how much your cash value can grow if the index performs exceedingly well. If the index tied to your EIUL goes up over the year, your cash value could go up — but not on a one-to-one ratio. Your policy will have a "participation rate," which is a percentage of the index increase that you earn. In addition, there could be fees, dividends and capital gains to account for.

EIUL policy choices

  • A flexible-premium personal insurance policy, with premiums paid every month, quarter or year
  • Survivorship life
  • Single-premium insurance policy
Source: National Association for Indexed Products

EIUL ups and downs

EIUL policies let you take advantage of good financial times, unlike traditional whole life policies. Yet EIUL offers some safety from bad market conditions, unlike some variable life policies without minimum guaranteed rates.

But on the other side, you do take more risk than you would with a traditional whole life policy, and in a stellar financial year you reap fewer rewards than you would with a variable life policy.

EIUL isn't for the novice insurance buyer. As with any life insurance policy, you want to understand what you are buying. Understand that parts of the illustration shown by your agent will not be guaranteed.

And, as with all life insurance purchases, you want to buy from a company that is financially healthy. Financial strength ratings are available from A.M. Best, Standard & Poor's, Moody's and others.

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