Equity Index Universal Life Explained

What is equity index universal life insurance? Equity index universal life (EIUL) is an insurance product in which most of its premium - usually between 80 percent and 90 percent – are invested in traditional fixed income securities. The rest of the premium is placed in call-option contracts, which are linked to a specific stock index. When the market rises, the option contracts are exercised, with a set percentage of the gains credited to the insurance policy. If the market falls, the options expire, worthless, and the insurance policy receives the minimum guaranteed rate.

Equity index universal life is appropriate for individuals who want to buy a variable life insurance policy, but do not want to take on the risk of the equities market. Equity index universal life offers both the potential for high returns associated with this market without imposing risk on the investment principal.

Features of equity index universal life:

With equity index universal life, you can adjust your premium and benefit as your financial circumstances change, while also linking cash value to the performance of a market index. This means your assets rise and fall with the index. Most EIUL policies provide a guarantee that your crediting rate will not fall below zero, regardless of what the market index does. The policies may also cap how high the cash value can increase if the index rises, however. Your cash value may increase, but you will only receive a percentage of the index increase. This is known as the participation rate.

Traditional universal life plans provide a credit of four percent to six percent. EIUL has the potential to credit 18 percent or more. The chief difference between traditional universal life and equity index universal life is the ability of the policy’s owner to participate, indirectly, in a rising market. Most insurers link their EIUL products to the Standard & Poor’s 500 Stock Index

How Indexing Works:

When the policy’s premium is put into an index account, it creates an "indexed account segment," which has a date on which the starting value of the underlying index is stated, and the percentage of change in the index’s value is determined. These segment periods vary from insurer to insurer.

The index crediting procedure calculates the index’s growth rate at the end of the index period. Almost every insurer uses a yearly point-to-point method in which the starting value of the equity index is recorded and then compared with its value at the end of the specified period. The minimum guarantees are not always credited every year, as some firms credit over a five-year period and other do so over the lifetime of the EIUL policy.

For more information from Steven on how to invest in annuities, their pros & cons, and common investment mistakes, visit his Annuities Investment Guide.