Indexed Universal Life- a type of universal life product that credits interest based on the performance of an external index such as the Standard & Poor’s 500® (S&P 500) or the Nasdaq- 100. This permanent insurance provides a benefit for the lifetime of the insured and extended nolapse guarantees are available on some policies via riders or embedded benefits. Premiums may not need to be paid for the policy term if cash accumulation warrants.
Indexed life provides guaranteed cash values that are typically a little less than those provided by traditional universal life plans. However, indexed life products provide the potential for greater interest crediting than the new money rates credited on traditional universal life plans as well. As compared to variable universal life, indexed universal life has guaranteed cash values, but the cash value potential is limited by one or more pricing levers used in the crediting formula of the indexed life policy:
- Participation rate: the percentage of the increase in the external index that will be credited to an indexed life policy’s account value (note that it may also be subject to a cap and/or asset fee).
- Cap: is the maximum amount of interest that will be credited to an indexed life policy’s account value (note that it may also be subject to a participation rate and/or asset fee).
- Spread/Asset fee: a percentage that will be subtracted from any gain in the indexlinked interest credited to the indexed life policy (note that it may also be subject to a participation rate and/or cap).
Other distinguishing characteristics between indexed and variable life include:
- Indexed life is a fixed insurance product and variable life products are securities.
- Indexed life products are regulated by the individual insurance commissioners of the United States; variable life products are regulated by Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD).
- Agents selling variable products need to be securities licensed (Series 6, 63, or 7) in addition to having an active life and health license, but agents selling indexed life only need to have a current life and health license.
- With an indexed life product, assets are held in the insurance company’s general account and the insurer assumes any risk; with a variable life product, assets are held in separate accounts and the policyholder assumes the risk.
- Indexed life provides guaranteed cash surrender values, variable life does not.
Because variable life is a securities product, it holds greater risk but also greater potential for reward. The variable life policyholder chooses from numerous subaccounts to allocate their funds and benefits from the increases (as well as the declines) in those stocks, bonds, and mutual funds. Most variable products provide subaccounts that offer varying degrees of risk, to reflect their client’s risk preferences. Therefore, if the policyholder wishes to maintain a more conservative asset allocation, they may invest their funds as such.
With an indexed life policy, there is more potential for gains than a fixed product, but less potential than a variable product because any gains may be limited by participation rates, caps, or spreads. The indexed life policyholder also has the ability to choose how they want their monies allocated; however, the funds are still held in the insurer’s general account. The policyholder is not given the choice to actively participate in the gains of stocks, bonds, and mutual funds, but is given the capability to receive possible indexed gains based on the performance of an external index such as the Standard and Poor’s 500® (S&P 500®). Furthermore, indexed life products allow the client different allocation selections:
- Do they want their potential gains based off of the performance of an available external index?
- Do they want their potential gains credited annually, biennially, or at the end of a term?
- Do they want their potential gains credited based on a number of different crediting formulas including annual point-to-point, monthly averaging, or monthly point-topoint?
- Do they prefer to have their premiums allocated to a selection that caps potential gains, or not? Would a strategy that uses only a participation rate and no cap be more desirable?
- Do they prefer to allocate their premiums to a fixed bucket, and receive a portfolio rate?
