Can You Lose Money with an Indexed Universal Life Insurance Policy?

Can You Lose Money with an Indexed Universal Life Insurance Policy?

Indexed universal life insurance offers certain features from several different life insurance policies. One of these unique features is its cash value growth component, which is invested in a market index fund. That means you can potentially earn more when the market goes up. However, some policyholders may be concerned about losing money when the market drops.

Fortunately, indexed universal life insurance has some built-in protections as well. This article will explain how universal life insurance works and compare its cash value to other permanent life insurance policies so you can decide which is right for you when looking for life insurance quotes.

How does indexed universal life insurance work?

An indexed universal life insurance policy offers lifetime coverage with adjustable premiums and death benefits. Part of each premium also goes into a cash value growth component. You invest the proceeds into a market index, where it can grow tax-deferred. You may also experience losses since your cash value is exposed to the market. However, indexed universal life insurance policies offer a minimum rate guarantee to ensure your cash value grows or at least remains the same.

When the cash value is large enough, you can borrow or withdraw from it. Furthermore, the insurer will pay you your full cash value minus surrender charges if you ever surrender the policy. You can also pay premiums with your cash value. However, if the cash value shrinks too much, your policy could lapse. 

How does indexed universal life insurance compare to other policies?

Here’s how the cash value of indexed universal life insurance compares to other permanent life insurance policy cash values:

Indexed universal life insurance vs. whole life insurance

Whole life insurance cash value grows at a fixed, guaranteed rate. This means you will not lose money on your cash value. However, it also means you may not see as much growth potential as with indexed universal life insurance. You also can’t pay premiums with whole life insurance cash value. Therefore, this cash value may work well for policyholders who want slow but steady growth and don’t want to use their cash value to pay premiums.

Indexed universal life insurance vs. universal life insurance

Both universal and indexed universal life insurance let you pay some or all of your premiums with cash value. However, universal life insurance cash value grows like whole life insurance cash value – at a fixed, guaranteed rate. This means you won’t lose money but have access to lower potential returns than indexed universal life insurance.

Indexed universal life insurance vs. variable life insurance.

Variable life insurance lets you invest your cash value in individual stocks, bonds, and other securities. These policies don’t often cap your returns, either. Investing in individual securities with no return cap offers more potential rewards but can also lead to larger losses. Variable life insurance has no floor rate, so you can theoretically lose all your cash value.

Variable life insurance may work better if you have a higher risk tolerance and are more confident when picking investments. On the other hand, indexed universal life insurance may be a good choice if you want exposure to the markets with less risk.

The bottom line

Indexed universal life insurance cash value provides a middle ground between whole and variable life insurance with helpful universal life insurance features. It offers more growth potential than whole life insurance, thanks to the ability to invest in a market index. At the same time, it offers less growth potential than variable life insurance, but the floor rate can minimize your losses.

As a result, indexed universal life insurance can help you earn healthy potential returns while preventing you from losing money. So, if you need a policy that combines some of the best features from other permanent life policies, consider indexed universal life insurance and talk to a qualified financial advisor about your options.

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