Although equity indexed annuities have been around for a
number of years, equity indexed universal life (EIUL)
insurance is a relative newcomer to the life insurance
marketplace. EIUL is a spin on universal life (UL)
insurance, a popular policy type because you can increase
or decrease your death benefit as your needs change and
your premiums can be adjusted accordingly. UL policies also
build a cash value against which you could borrow or even
use to pay your premiums.
The equity indexed concept is relatively simple: the amount
of interest credited to your policy's cash value is tied to
the performance of a particular index (the S&P 500 is one
of the most popular), so that in years where the index
performs well your interest crediting rate will rise, and
in years where the index performs poorly, your interest
crediting rate will fall.
Most policies guarantee that your interest crediting rate
will never fall below zero so that you won't lose money
(you just won't make it). They also have a cap as to how
high a crediting rate they will pass on to you. This range
of possible rates is often described as offering "upside
potential with downside protection."
How It Works
Typically, the big choice facing life insurance buyers is
whether to go with a "safe" universal life policy that
offers a minimum guaranteed rate but limited potential for
cash accumulation or to go with a more "risky" variable
life policy that offers greater potential for earnings but
no protection against losses in the market.
EIUL insurance is an attempt to fill the gap between these
two approaches. EIUL is universal life insurance in which
the cash value is linked to a certain index. If the index
is higher at the end of the year, your cash value may go
up. If the index stays flat or goes down, your cash value
earns the minimum guaranteed interest rate (say, 2
percent). You should note, however, that when your index
goes up it doesn't mean that your cash value increase will
reflect the full index increase, due to fees, and dividends
and capital gains aren't included in the cash value's
calculation.
But are these new products the best of both worlds? Let's
take a look at both sides of the coin.
The Pros and Cons
One advantage of EIUL is the potential for higher interest
crediting rates than a traditional universal policy.
Another advantage is that it offers greater protection from
market downturns than a variable life insurance policy.
Stephan Mitchell, product & competition analyst for Pacific
Life Insurance Co., based in Newport Beach, Calif., points
out that while these products are not a cure-all, they can
offer "an attractive middle ground for buyers who saw the
market downturn of 2001-2002 and are looking for some
guarantees." These products can offer some peace of mind to
buyers looking for a mix of guarantees and some potential
for cash accumulation.
However, there can be disadvantages to having an equity
indexed product. The chief disadvantage of an equity
indexed product is that it comes equipped with slightly
higher risk than a traditional universal policy. Also, the
cap rate — the maximum rate you may earn —
limits the upside potential compared to a variable policy
and may be changed periodically by the insurance company.
Steven Weisbart, economist for the Insurance Information
Institute, also cautions that "the crediting rate system in
these products is probably not familiar to would-be buyers
and agents." Since there are so many "moving parts" to one
of these products, it is sometimes difficult to figure out
what the product actually does at first.
EIUL insurance policies do fill a void between the
traditional bookends of the modern insurance marketplace,
but it would be an overstatement to term them the best of
both worlds. EIUL has neither the appealing guaranteed
rates of universal life nor the true market participation
of variable life insurance. However, EIUL does offer an
attractive third option for buyers and may be ideal for
folks whose needs have been overlooked by existing
insurance choices.
Is It Right For Me?
Equity indexed universal life insurance may be right for
you if you fit the following criteria: The potential cash
accumulation of variable life insurance is enticing to you
but seems too risky and the guarantees of universal life
are comforting to you but the potential for cash value
accumulation seems too low.
If these conditions describe you, then an equity indexed
universal life insurance policy may be an avenue for you to
explore. But before deciding on a particular product, be
sure to research the insurance company behind it.
After all, the amount of interest you are credited is in
the hands of the company and whatever guarantees the
product offers are only as solid as the insurer itself.
Just as with other types of insurance, always check into
the insurer's ratings (A.M. Best, Moody's, Standard &
Poor's, etc.) to get a better picture of how strong the
company is financially.
Visit Insure.com for a free universal life insurance quote.
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Amy Danise is a staff writer for http://insure.com . Visit
http://insure.com for a comprehensive array of comparative
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