Equity-Indexed Universal Life Insurance Policies

Life insurance policies aren't just for protecting loved ones. Permanent life insurance policies can help you build wealth through the cash value growth component, which builds with each premium and earns tax-deferred interest or gains. However, the cash value's growth and other features can vary by policy. Some policies pay a fixed rate, whereas others, such as equity-indexed universal life insurance, let you put the cash value in an equity index account. Below, we'll discuss how equity-indexed universal life insurance works and review its benefits and drawbacks to help you see if it's the right policy type for your needs.

What is equity-indexed universal life insurance?

Equity-indexed universal life insurance is a universal life insurance policy with cash value that is placed in an equity index account.¹ This account is tied to the performance of a stock market index, such as the S&P 500. The cash value can earn potential returns if the underlying index grows.

Pros and cons of equity-indexed universal life insurance

Equity-indexed universal life insurance's market exposure offers some financial benefits, but downsides exist. Here are some pros and cons of an equity-indexed universal policy:¹

Pro: Lifelong coverage and cash value growth

Equity-indexed universal life insurance protects you for life and offers cash value growth since it's a permanent policy. This lets you treat your life insurance policy as a form of financial protection and take advantage of potential investment growth at the same time. Doing so could simplify more complex financial situations since you accomplish two goals with one financial product.

Pro: Your cash value won't decrease in the event of a market downturn

With equity-indexed universal life insurance, insurers offer a “floor” that guarantees against a certain amount of losses.² For example, say your policy's floor is 0%. The market has a downturn, causing the underlying index to fall significantly over a specific period. Instead of losing cash value, you will simply earn 0% for the period in question.²

Pro: Can come with lower premiums than other types of permanent life insurance

Equity-indexed universal life insurance starts out costing more than whole life insurance. However, you can pay premiums with cash value, which could save more money in the long run.³ Equity-indexed policies tend to have lower management fees than variable life insurance policies.

Con: Complex policy

Equity-indexed universal policies require you to understand stock market basics, as well as select and manage investments. Furthermore, if you use the cash value to pay premiums, you'll have to track it to ensure you keep enough in the policy to prevent it from lapsing. Finally, insurers may charge management fees since you invest in a security. All these additional elements can make these policies more challenging to manage unless you are confident in your investing knowledge and willing to take a more hands-on approach.

Con: No guaranteed market returns

There are no guarantees in the stock market. Therefore, equity-indexed universal policies can't guarantee returns. This differs from policies like whole life insurance, which offer a low but guaranteed interest rate regardless of the economy or stock market performance.

Con: May have return caps

Equity-indexed policies may cap your returns to offset the fact that you are protected from losses.² For example, a policy imposes an annual cap of 8%. If the underlying index earns an annual return of 10%, you'll only earn 8%.