Equity-Indexed Universal Life Insurance Policies

Life insurance policies aren't just for protecting loved ones. Permanent life insurance policies can help you build wealth through the cash value growth component, which builds with each premium payment and earns tax-deferred interest or gains. However, the cash value's growth and other features can vary by policy. Some policies pay a fixed rate, whereas others, such as equity-indexed universal life insurance, let you put the cash value in an equity index account. Below, we'll discuss how equity-indexed universal life insurance works and review its benefits and drawbacks to help you see if it's the right policy type for your needs.

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What is equity-indexed universal life insurance?

Equity-indexed universal life insurance is a universal life insurance policy with cash value that is placed in an equity index account. This account is tied to the performance of a stock market index, such as the S&P 500.¹ The cash value can earn potential returns if the underlying index grows.

Pros and cons of equity-indexed universal life insurance

Equity-indexed universal life insurance's market exposure can offer some financial benefits, but downsides exist. Here are some pros and cons of an equity-indexed universal policy:²

Pro: Lifelong coverage and cash value growth

Equity-indexed universal life insurance helps protect you for life and offers cash value growth since it's a permanent policy. This lets you treat your life insurance policy as a form of financial protection and take advantage of potential investment growth at the same time. Doing so could simplify more complex financial situations since you accomplish two goals with one financial product.

Pro: Your cash value won't decrease in the event of a market downturn

With equity-indexed universal life insurance, insurers offer a “floor” that guarantees against a certain amount of losses.³ For example, say your policy's floor is 0%. The market has a downturn, causing the underlying index to fall significantly over a specific period. Instead of losing cash value, you will simply earn 0% for the period in question.

Pro: Can come with reasonable premiums than other types of permanent life insurance

Equity-indexed universal life insurance can start out costing more than whole life insurance. However, you can pay premiums with cash value, which could save more money in the long run.⁴ Equity-indexed policies tend to have lower management fees than variable life insurance policies.

Con: Complex policy

Equity-indexed universal policies typically require you to understand stock market basics, as well as select and manage investments. Furthermore, if you use the cash value to pay premiums, you may have to track it to ensure you keep enough cash value in the policy to prevent it from lapsing. Finally, insurers may charge management fees since you invest in a security. All these additional elements can make these policies more challenging to manage unless you are confident in your investing knowledge and willing to take a more hands-on approach.

Con: No guaranteed market returns

There are no guarantees in the stock market. Therefore, equity-indexed universal policies can't guarantee returns. This differs from policies like whole life insurance, which offer a low but guaranteed interest rate regardless of the economy or stock market performance.

Con: May have return caps

Equity-indexed policies may cap your returns to offset the fact that you are protected from losses.³ For example, a policy imposes an annual cap of 8%. If the underlying index earns an annual return of 10%, you'll only earn 8%.

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Is equity-indexed life insurance right for me?

Here are some typical situations where you might consider an equity-indexed universal life policy:

You have a moderate risk tolerance: If you want more potential rewards without as much risk as a variable life insurance policy, equity-indexed universal life insurance may be right for you.

You need flexibility: Equity-indexed universal life insurance can let you adjust premium payments as necessary, as well as pay premiums with cash value. This can offer additional flexibility with your budget.

You're supplementing your retirement savings: If you have maxed out other tax-advantaged retirement options, equity-indexed life insurance could offer additional tax-deferred investment opportunities while helping you protect loved ones.

You want to leave a larger legacy: The larger death benefit and index-based cash value could help you leave more wealth to your heirs while minimizing estate taxes if structured properly, such as in an irrevocable life insurance trust (ILIT).

You're confident in your investing knowledge: These policies are more hands-on and can come with additional risk. Therefore, they may work better if you like a hands-on approach and feel more confident managing investments.

Alternatives to equity-indexed universal life insurance

If equity-indexed life insurance doesn't sound right for you, there are other alternatives you can evaluate:

Term life insurance

Term life insurance, is a temporary policy that can last 10 to 30 years. Outliving the policy term will require you to renew or get a new policy to continue your coverage. However, term life insurance is a very cost-effective policy since it often offers a larger death benefit for reasonable premiums. This can make it a good option if you need the most coverage for your dollar.

Whole life insurance

Whole life insurance lasts for life and tends to cost less than equity-indexed universal life insurance. The cash value grows at a fixed, guaranteed rate, insulating it from the economy or stock market fluctuations. You can borrow and withdraw from the policy, but you can't pay premiums with the cash value. Overall, this policy may work well if you need a simpler and more stable form of lifelong cash value life insurance.

Universal life insurance

Universal life insurance offers the same lifelong coverage and fixed cash value growth as whole life insurance. However, you can also use cash value to pay premiums. Additionally, you can adjust your premiums and death benefit as needed.

Final expense insurance

Final expense insurance is a smaller-dollar whole life policy designed to help cover funeral costs, medical bills, and other end-of-life expenses. It offers:

Competitive premiums

Lifelong coverage

A smaller death benefit

Cash value that grows at a fixed, guaranteed rate

This type of policy also does not usually require a medical exam, making it a great way to potentially get coverage quickly and conveniently.

Get a life insurance quote today

Equity-indexed life insurance can offer prospective policyholders hands-on opportunities to potentially grow their cash value faster. However, since this policy is more complex, it may not work as well for policyholders who prefer a hands-off approach and guaranteed returns.

Fortunately, Aflac offers numerous alternatives to equity-indexed universal life insurance. Speak with an agent today to explore our range of life insurance policies and get a quote.

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