Index growth insurance policies are a good form of investment, but they aren’t the best. The policy offers a death benefit and a cash value account that accumulates interest. However, the interest rate fluctuates based on the market, and your returns are capped at a limit so that even in good months, you get lesser returns.
Indexed growth insurance policy, also called an indexed universal life insurance policy, is permanent life insurance. This means that your premiums go towards your death benefit and a cash value account that earns interest.
The interest earned is based on a stock market index determined by your insurer. The funds in your cash-value account do not earn a fixed rate of interest but rather come with an interest rate guarantee.
Features Of An Indexed Growth Insurance Policy
For a better understanding of whether an index growth insurance policy is a good investment or not, we’ve listed some of its features/benefits.
Market-friendly Interest Rate
According to the National Association of Insurance Commissions (NAIC), your indexed universal policy does not earn a fixed interest rate. Instead, your interest rate is whatever the market index is, and the market you invest in is determined by your insurer.
Adjustable Premium Payments
Not every month can be great for us financially. Some months, you will find it difficult to mop up enough cash for your insurance premiums.
The good thing about indexed growth policies is that you can use the money in your cash-value account to pay your premium for financially rough months.
Flexible Death Benefit
Death benefits in indexed life policies are flexible; Hence you can lower or increase the death benefit on your policy at any time. However, to increase the amount of death benefit on your policy, you have to take a medical examination and pass.
Access To Cash Value
You have more access to your cash value account than you might think. For example, you can take a loan from your cash value account at a predetermined interest rate by your insurer.
You are also free to make withdrawals from this account, but usually, doing reduces the value of your death benefit. While the money is yours, it forms a part of your policy; Hence withdrawals reduce the value of your policy.
Your policy also can lapse if you make frequent withdrawals from your cash value account and the balance on it is not large.
Index growth policyholders do not pay capital gains on any increase in the value of their cash value investments unless they abandon the policy. In contrast, other accounts may pay these taxes upon withdrawal. This benefit also applies to any loans that you take against your cash-value account.
Disadvantages Of Index Universal Life Insurance Policy
There are many drawbacks that come with purchasing an index growth policy, and we highlighted a few of them below:
Limit On Returns
Insurance companies set a limit for how much return you can receive. Usually, these rates are lower than 100% and as low as 25%. In addition, return on equities is capped at a limit during good years. These limitations restrict the number of returns due to you annually.
When this is the case, you are better off investing directly into the market or purchasing a universal life policy.
No Fixed Interest Rate
Other life insurance policies offer a fixed interest rate on your cash-value account, but this isn’t the case with indexed universal policies. Rather than using a fixed interest rate, they use an indexed market rate which is subject to fluctuations. This means you have to be comfortable with fluctuating returns every month.
Index universal policies are among the most expensive forms of life insurance. This is because the package comes with a ton of fees and other costs such as:
1. Fees and commissions
3. Surrender charge
4. Administrative charges
5. Premium expense charge
These costs can diminish the rate of return on your policy. Therefore, we will advise you to understand the nitty-gritty of any policy you purchase, so you know what you are getting in coverage and what to expect as returns.
Pros And Cons Of Index Growth Insurance Policy
|No capital gains||High fees|
|Flexible premium payments||Limited returns|
|Access to the cash value||No fixed interest rate|
Who Is An Index Growth Insurance Policy Best Suited For?
Indexed universal life policies are suitable for anyone who wants lifelong coverage on life insurance and want to build up their cash value over a long period.
The NAIC suggests that these policies offer growth based on the market index and protect you from losses should the value of the market decrease.
These are the major reasons anyone would consider an indexed growth policy, and if these reasons appeal to you, you should discuss further with your insurance agent.
There are many reasons why an indexed growth insurance policy will appeal to you- it combines a death benefit as well as cash value, it allows flexible premium payments, and you have access to your cash value for loans and withdrawals. In addition to this, the gains on your cash value are tax-free.
However, there are also drawbacks associated with this policy type- capped returns, no fixed interest rate, and high cost of fees.
We would advise you to discuss the different life insurance policy options with your insurance agent before selecting a policy.