The market: sometimes it goes up, and sometimes it goes down. No expert or planner can completely predict, or even fully explain, these outcomes, but analysts can increase their chances of success by carefully watching market behavior.
Think we are talking about the stock market? Actually, we are talking about life insurance.
Yes, life insurance.
Life insurance protects families and businesses from the death of a family member, business owner, or other key person. You buy in to the policy, and receive a helpful payout in the event of a tragedy. Sounds simple enough. But while your money is in the system, it may be invested in a product that mirrors the stock market, interest rates or a particular company and that means that how much you get back depends on the performance of the accounts the money is invested in. But there are many different ways that investment can work, and understanding all the options (for this article we will focus on permanent life insurance) is critical in making a decision on what is best for you and your family.
We’ll start the discussion by talking about the permanent life insurance product, Index Universal Life Insurance.
Index Universal Life (IUL)
Index Universal Life Insurance is a permanent life insurance product lets people take advantage of market gains, while protecting them from market losses. As the name implies, Index Universal Life invests money into indexes. Which index a product uses depends on the carrier and the product, but the S&P Index is a common choice. Participation in the index ranges from carrier to carrier, but typically there is a ceiling around 8-11% and a floor of 0-2%. That means that as the index rises and falls, the client’s investment rises and falls with it, but only within that defined range. If the index rises above the ceiling or falls below the floor, an IUL product stops moving and stays where it is.
To see why this arrangement may be a good idea, let’s look at other products for comparison.
Universal Life (UL)
Universal Life Insurance involves investing the client’s money into fixed financial instruments, rather than an index. That means that the client is still protected from market losses, but can only realize gains of around 3% to 5% (depending on fixed rate market conditions). The actual number recently is on the low end of that spectrum due to the low interest rate environment we are in. UL definitely has its place, but the difference is important.
Variable Universal Life (VUL)*
Variable Universal Life Insurance was very popular in the early ‘00’s, but when the market crashed, many policy owners lost much or all their money. The issue here is that while the upside is unlimited, so is the downside—there are no protective limits to market participation. We consider it risky choice for people’s life insurance money unless a licensed asset manager is involved with the decision.
Whole Life (WL)
Whole Life Insurance means investing, not in the stock market, but in the company that built the product. For example, if someone owns a policy with MassMutual, they are investing in the success of MassMutual. They receive a dividend. Recently, MassMutual has done well, because of the low interest rate environment we are in today. Our concern is that the client is literally putting their entire investment in one place, so if something does go wrong with the insurance company, the policy owner is hurt because of the lack of diversification. These aren’t bad products, but deciding when they are appropriate can be confusing.
Index Universal Life Insurance protects policy owners from market downturns, like UL does, but also provides a way to take advantage of market gains, at least up to a point. And IUL, unlike Whole Life Insurance, is tied to something outside of the carriers’ control. No question, advisors have gotten in trouble selling IUL, but many of these had aggressive sales tactics and didn’t understand the markets. With a more cautious and knowledgeable approach, Index Universal Life Insurance can be quite safe and reliable.
* This general description of VUL is for informational purposes only. KazSource is not making any recommendation for or against, nor endorsing VUL products. For more info on VUL, please consult a licensed financial advisor.