Pros and Cons of Universal Index Life Insurance Policies

by Jeff Rose on October 5, 2016 · 5 comments

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universal life insurance pros and consThere are dozens of different insurance products, each of them has their own set of advantages and disadvantages. Trying to decide which one works best for you can be a long and complicated process, but it’s vital that you understand all of the options and what they provide.

One of the insurance products receiving some interest in recent years has been the universal index life insurance policy. These life insurance policies are permanent life insurance policies, build cash value over time, and provide the ability to take advantage of stock market gains.

While the universal index life insurance policy can be a way to aggressively grow your cash value in a life insurance policy over time, it’s important to be aware that there are drawbacks to these types of policies as well.

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How Universal Index Life Insurance Works

As with most life insurance policies, your premiums go to the insurance company, which then invests the money in bonds, stocks, funds or other investments. The insurance company makes money, hoping to make enough from premiums and investments that it can afford to pay out benefits when the insured’s life ends.

With a universal index policy, part of your premium is invested in a fund that is connected to a particular index. (Many policies are indexed to the S&P 500.) When that index does well, your cash value builds faster, and you earn more money for that year, to go into your cash value fund. If the index doesn’t do well, your cash accumulates much slower.


Many policies allow for a flexible premium, and you can choose to add more in order to help you build up your cash fund. Most universal index life insurance policies come with a guarantee that you will be credited a certain amount each year — regardless of how well the index does. This might be a very low number, such as 1% or 2% (or even a guarantee that you just won’t lose money), but it’s still an assurance that you won’t lose cash value.

Additionally, it its worth noting that most of these types of life insurance policies also have caps. This means that you won’t end up growing your cash value by as much as you would like if the index does really well.

Pros and Cons of Universal Index Life Insurance Policies

One of the biggest advantages of a universal index life insurance policy is the potential for growth, while you receive protection from volatile markets. Your cash value, depending on the state you are in, might also come creditor protection. Plus, it is usually possible to withdraw money from your cash fund without running into the same penalties and restrictions that come when you withdraw early from a tax-advantaged retirement account.

On the downside, though, is that most of these policies come with fairly high fees. The commissions are often front-loaded, so it can take years before your cash fund sees significant growth. Later in life, you might not have enough value in your cash fund to keep the policy in force, and your premiums might go up if you want to keep the policy current.

And, of course, your gains are limited by the process used by the life insurance company to figure out how much you end up with from stock market increases. In some cases, you might be better off just investing in an index fund on your own, without doing it through an insurance policy.

Overall, I still can see a place where these type policies can make sense.   Currently, I can no longer participate in a Roth IRA, so I’ve been looking for another potential option to  defer some money.    An index universal life policy just might be the ticket.   I’ll have a follow up post that shows what I bought and how much I’m paying.

The Alternatives

After reading about the pros and cons of Universal Index Life insurance policies, you may have decided that they aren’t the best option for you. Don’t worry, you aren’t the only one. They are complicated and confusing plans that have several pitfall, but luckily there are several other great options that you can choose from.

The first and most popular option is the term life insurance. If you’re looking for the simplest and most affordable option, term life insurance is the way to go. These plans are effective for a predetermined amount of time, normally you buy them in 10,20, or 30-year terms. After that term is up, your policy is no longer effective, at that point you would have to apply for a new policy. Think of the term lengths as expiration dates.

Another common alternative is whole life insurance. It works similarly to term life insurance, but with one significant difference, it lasts as long as you continue to pay the monthly premiums. Unlike with term, there is no pre-determined effective length, as long as you pay, these policies are in force. There are a lot of life insurance applicants that prefer the idea of being able to keep one policy for the rest of their lives, instead of having to reapply in the future. While it’s a nice advantage, these plans are going to be more expensive.

How much Life Insurance do you need?

Regardless of the type of policy that you choose, it’s important that you get enough coverage. Having too little coverage is almost as bad as not having insurance at all. So, how do you know if you’re getting enough life insurance? There are several different financial factors that you have to consider to ensure that you have enough life insurance for your loved ones.

The first is how much debt you have and would leave behind if you were to pass away. When you die, all of your unpaid expenses are passed on to your family members. There are a lot of families that find themselves with massive debts that they have no way of paying for. Before you purchase a plan, sit down and add up all of your debts, mortgage, car payments, students loans, and everything else that would be passed on to your loved ones. After you have calculated how much debt that you have, you have your starting point for what your life insurance policy has to cover.

The other goal of life insurance is to replace your income for any financial loss that your family would suffer after your passing. If you’re on one of the main income earners in your family, how would they get by without your salary? If you were to pass away, your family would need time to find a way to permanently replace the lost income that you provided, this is where life insurance is so important. It gives them the funds they need to recover from the loss without adding any additional financial strain.

Working with an Independent Agent

Everyone wants to save money anyway that they can, and your life insurance policy is no different. If you go with a Universal Index Life insurance policy, or you go with a basic term life insurance policy, either way there are some techniques that you can use to save money on your plan.
One of the best ways to save money is by working with an independent agent to find the perfect policy. Every insurance company is different. All of them have different rating systems and different monthly premiums, that’s why it’s important to find the insurance company that fits your needs the best. There are hundreds of different insurance companies on the market, you could spend days or weeks calling agents or researching companies, but this is where independent agents come in. Instead of only representing one company, our agents represent some of the highest-rated companies in the United States. We can bring all of the lowest rates to you, no calling, no answering the same question. Your time is valuable, it shouldn’t be spent sitting on hold with dozens of insurance companies.

The best way to ensure that you’re getting the lowest rates is to compare all of the possible answers, if you want to get started, fill out the quote form on the side. We will deliver the best rates from off the companies near you

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Pros and Cons of Universal Index Life Insurance Policies
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What is universal index life insurance? How does it work? What are its boons and banes? Is it right for you? Call us and we'll give you the best options.
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{ 5 comments… read them below or add one }

Sydney James March 9, 2012 at 3:13 am

There are quite a few credit card companies offering term life insurance coverage. Could someone try to help me decide which credit card has the best coverage to offer?

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D. LeBlanc March 9, 2012 at 3:35 am

For people who have pre-existing conditions such as disability and have questions regarding there qualification for life Insurance and Disability insurance the best thing for them to do is to arrange to have the no cost, no obligation medical offered by the life insurance company in order to confirm there premiums and qualification. Something to keep in mind is most pre-existing conditions will not be covered by any new coverage taken out.

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Debbie October 4, 2013 at 9:51 pm

Would you advise someone to invest 25,000/year for 10 years in global index universal life insurance.

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Jeff Rose October 21, 2013 at 2:38 am

@ Debbie Contact our office and we can discuss further.

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Gref February 8, 2014 at 2:19 am

What a load, as the stock market grows, so does your money, and you pay a tax on most of those growth dividends too, as the market falls so goes your money. At the end of your life, if the market is up, great you get the value of the account, if you sell off the position, you pay a fee to do so, and if your lucky there is still no inheritance tax. If you had the same amount in cash value in IUL life insurance, which you could take the money any time, and there may be a fee, when you will leave this world, the law in California states the death benefits must be more than the cash value. In this one end result, death, your beneficiary have more than you left them in cash, and in most cases no taxes due. Back to the beginning, yes, there are fees, yes the IUL is front loaded. How much would you pay to never lose your investment? Yes, I said it, with IUL’s the cost for insurance may go up, and the S&P or which ever market you have tied the IUL to may also go up, even with a cap of 13% your investment is safe. In the last 13 years, quoted from Schwab the S&P grew 77% with the huge swings, at the same time in IUL land, only looking at the gains as the IUL does (only crediting from 0 to 13%), the IUL S&P returned 115% growth, only taking growth up to 13% and no credit below 0% is given. All the while protecting we the consumer from losses we would have to recapture if the money was in the Market with no IUL protection. Let us look at the straight death benefit now. Here is this bucket of money we have added to our whole lives coming to head, you have cash in the cash fund, and you die. It over, all the cash in the world will not bring you back. The IUL death Benefit pays out, and pays out more than your bucket of investment has grown to, wow, its was front loaded, there were fees to limited your risk, and in the end the beneficiary not only got the cash value, but some added death benefit too. It gets even better for the IUL owner when they don’t die… I don’t want to spoil the best part, but is you fought through my lame spelling and writing, email me and I will tell you the rest… have a great day

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