Indexed life insurance offers policyholders a chance to have life insurance protection along with a competitive interest rate without risking cash values. Indexed life insurance also has many benefits and drawbacks and are is suited to everyone. Even if you decide indexed life insurance is appropriate, you must qualify for it based on a number of factors.
Indexed life insurance is the newest form of life insurance available in the marketplace. In the past, only two forms of life insurance were available--term and whole life. During times of high interest rates, insurance companies saw sales of whole life falter, so universal life was born, allowing policyholders a chance to make a higher return on their cash values. In the 1990s, when the stock market reached new heights and interest rates dipped, insurance companies' latest innovation was variable universal life. This allowed policy holders a chance to invest their cash values in the market. Indexed life insurance is the latest product, giving policyholders a chance to earn a decent rate of return on their cash values without the risk of the stock market.
Indexed life insurance usually is sold as a universal life policy, meaning that a person is purchasing a life insurance policy that invests excess premiums in a side fund known as cash value. Premiums that aren't used for the cost of the insurance, fees and other policy costs, are held in the cash value and mirror an index that the policyholder chooses. The most commonly used index is the S&P 500. As the index grows each year, the policyholder receives a corresponding rate of return up to a certain cap. Conversely, if the index suffers a loss during the course of the policy term (usually one year), the policyholder does not see any loss. This is an attractive feature for policyholders looking for some guarantees during times of market volatility.
The benefits of indexed life insurance are many. The death benefit of the policy provides protection for the beneficiaries of the policy in case the insured dies prematurely. The owner of the policy also can choose between multiple investment strategies within the contract, and change these year by year. As with any cash-value life insurance policy, indexed life insurance offers loan and withdrawal privileges. Be sure to read the specifics of these features before sending any money. Money inside a life insurance policy also grows on a tax-deferred basis.
Indexed life insurance is subject to surrender charges. These can range from 10 to 20 years. A surrender charge is assessed if the policy owner cancels or "surrenders" the policy in the early years of the contract. These surrender charges can be very high and sometimes leave the policy owner with little or no refund on premiums paid. If the policy owner is not planning on keeping the policy for a long period of time, usually indexed life insurance is not a viable option because of the costs of canceling a policy. Be sure to read and understand the surrender charge schedule before buying a policy.
As with any life insurance policy, a person must qualify based on a number of factors--age, health, occupation, avocation and financial standing. The highest underwriting focus is on the health of the proposed insured. Because of the insurance company is taking a risk on the person by providing a guaranteed death benefit to the beneficiaries, the insurance company will discriminate based on a number of health factors. Its is often advisable to complete the indexed life insurance application and see what rating the insurance company is offering before submitting the first premium. A life insurance agent can also help determine which life insurance companies are most suited to underwrite certain health conditions.