Registered Index Variable Universal Life Insurance Pros And Cons

Index Variable Universal Life Insurance (IVUL) provides permanent death benefit protection while offering a unique way to grow your cash value account. It takes elements of both index universal life (IUL) and variable universal life (VUL) and combines them to provide customers with a structured return. Registered index variable universal life (RIVUL) or hybrid UL are 2 alternative names for IVUL.

IVUL’s cash value account will reflect equity returns, but does so without investing in equities directly. On a periodic basis, the cash value account is credited with interest based on the returns of an underlying equity index. IVUL allows for retaining the upside while offering some protection against losses.

Index variable universal life insurance may be valuable to some people as it continues to grow in popularity. However it is important to know how it works before purchasing a policy. There are several pros and cons between index variable universal life and other types of life insurance.

Understanding Index Variable Universal Life (IVUL) Insurance

Index variable universal life is being positioned as an alternative to index UL (IUL) and variable UL (VUL) products. It offers higher potential returns than IUL, but with the risk for some negative returns in down markets. Therefore, IVUL is typically used as a cash value insurance policy that benefits from tax-free capital gains and less downside than VUL.

When you purchase an IVUL insurance policy, you are buying permanent life insurance coverage as long as the required premiums are paid. This means your named beneficiary will get the death benefit if you die.

Additionally, IVUL has a cash value account component. The cash value account earns interest based on the performance of an underlying fund. Often the returns are linked to the S&P500 price index. Your account value will grow or decrease depending on how the fund performs.

What makes IVUL unique is the structured payouts it offers. When you own an IVUL product you will allocate your cash value to a portfolio strategy with pre-determined return ranges. This allows you to design a risk & reward profile that you want.

Index variable universal life is a hybrid of IUL and VUL putting its risk-level between the two products.

Index Variable Universal Life Portfolio Design Elements

There are 3 main portfolio designs that are offered for cash value investment: Buffers, Deductibles, and participation rates (par rates). These 3 elements can be mixed and matched to achieve various return ranges on the product.

• Buffer – The insurance company absorbs the first X% of losses of the underlying index. If the buffer is 10% and the S&P500 is down 17%, the customer only has a 7% loss.
• Deductible – The customer absorbs the first X% of losses but has a capped loss of the deductible. If the deductible is 10% and the S&P500 is down 17%, the customer only has a 10% loss.
• Participation Rate – Participation rate (par rate) applies a factor to the return of an underlying fund. An 80% participation rate means the account is credited 80% of the underlying funds return while a 125% par rate means the customer gets 125% of the return.

These 3 designs can be combined into many different payout structures. For instance, having a deductible with a 125% par rate means you have a known capped downside at the deductible. But you have a leveraged upside that will return more than the index in good years.

Benefits of Index Variable Universal Life (IVUL) Insurance

There are many pros to index variable universal life insurance, but as always the case, you need to do your own research. Everyone’s specific needs and risk levels are unique to their personal financial situations.

1) Higher Return Potential

Index variable universal life insurance has return potential that is comparable to VUL. The structured return ranges are often uncapped or even have multipliers on the return of the index leading to better returns than the index.

This does come with the potential for negative returns over a given period if equity markets are down.

The insurance company is investing in bonds, options, and other financial derivative instruments to achieve the return ranges.

Compared to other permanent life products, index variable universal life has more upside than a guaranteed universal life (GUL), whole life (WL) or index universal life (IUL) product. All 3, WL, GUL and IUL have a minimum return of at least 0%. However, index variable universal life returns are dependent on the performance of the underlying index, like the S&P500, and can return a negative.

2) Tax-Advantaged Portfolio Growth

Policyholders do not pay capital gains on cash value growth as long as they keep the policy active. This benefit typically extends to any loans you take against the cash value as a way to access your cash value. Loans against permanent insurance can be appealing when compared to the penalties and taxes that occur when withdrawing from 401(k) plans or individual retirement accounts (IRAs).

[Professor B.T. Effer Note – taking a policy loan is not without risk. Loans are typically deducted from the death benefit. If you have a life insurance policy primarily for the death benefit, you may not want to take a loan.]

3) High Level of Flexibility

Index variable universal life insurance offers flexibility when choosing and designing a policy for your financial goals. Products from different life insurance companies have different designs. And once you purchase a policy, you are able to allocate your account value into different investment segments with different payout designs.

Index variable universal life products often come with riders that allow for further product customization. A common UL rider is the no-lapse guarantee (NLG) rider that sets up a secondary ‘shadow’ account. The shadow account has separate charges that are guaranteed at issue. Therefore, you can solve for the premiums required to have a lifetime no-lapse guarantee to ensure your policy remains active regardless of market performance.

Other popular riders include long-term care riders to cover nursing home costs or in case you become disabled.

Lastly, universal life products allow for both flexible premium payments and flexible death benefit growth. If the market outperforms, you have the potential to pay less total premiums or get a higher death benefit. This is especially true for registered index variable universal life insurance with it’s high return potential.

4) Death Benefit Protection

Index variable universal life is a permanent life insurance product. You get a death benefit that is paid out to your named beneficiary upon your death that remains active as long as you pay the required premiums.

The death benefit can be used to cover funeral expenses, outstanding debt, college costs of children, and/or support your family. (Read more about how to determine your life insurance needs here).

5) No Impact to Social Security

Social Security benefits are a key component of most people’s retirement plans. You can start taking Social Security as young as 62, but if you defer it the benefit paid increases up to the max deferral age of 72.

Index variable universal life insurance cash value doesn’t count against any Social Security earnings thresholds. Additionally, loans you take out against your cash value are also excluded from Social Security thresholds. This makes UL products like index variable universal life valuable in retirement planning. For example, you can take a loan against your accumulated cash value while not losing any Social Security benefits.

6) Unique Return Ranges & Option for Uncapped Returns

Index variable universal life insurance allows you to invest in pre-determined return ranges. This is similar to index UL which has a floor of at least 0% and a cap. But index variable universal life offers much higher caps than IUL, often having uncapped upside. The higher upside is available because index variable universal life has the potential for negative returns.

Depending on how the equity markets move, some downside protection through the buffer or deductible feature and uncapped upside may lead to outperformance and higher cash values over time.

7) No Required Minimum Distributions (RMDs)

Many tax-advantaged retirement accounts have required minimum distributions (RMDs). These are set by the IRS in order to get taxes that have been deferred. Unlike 401(k) or traditional IRAs that have RMDs after a certain age, cash value in your universal life insurance policy does not have RMDs.

However, there are charges against your account value that do tend to increase over time. For example, UL policies have mortality charges that increase as your probability of dying increases as you age.

Drawbacks of Index Variable Universal Life (IVUL) Insurance

There are several drawbacks to index variable universal life despite all the positives. A major negative aspect of index variable universal life is the potential for higher than expected premiums payments if the market performance is continually poor. Poor market performance can also limit the cash value growth. Additionally, UL products take charges out of the account value and if the account value goes to zero you may need to make extra premium payments or the policy will lapse.

1) Can Have Negative Portfolio Returns

Whole life, index universal life, and guaranteed universal life all have returns floored at a minimum of 0%. However, index variable universal life, like variable universal life, can have negative returns in down markets.

Over a long time horizon, the higher potential upside is expected to lead to better account value returns. However, having low account values may limit the upside you earn.

2) High Fees

All universal life products have a large amount of fees and costs taken out of your account value. These include, but may not be limited to:

• Mortality charges
• Premium loads
• Administrative expenses
• Flat fees
• Per thousand of face amount charges
• Surrender charges
• Rider fees

These fees are taken out of your account value which lowers the investment base and is a drag on the returns of your policy. The amount and timing of these charges differ between insurance companies and products so it is important to know what you are buying.

3) Limited Guarantees

There are limited guarantees on index variable universal life policies. Unlike whole life or guaranteed universal life which have guaranteed minimum account value returns, IVUL can have negative returns in down markets.

This means you need to be comfortable seeing negative returns on your cash value in down years.

There are riders available which offer secondary guarantees to keep your policy inforce, but these come with additional charges.

4) Not Available At All Insurance Sellers

Index variable universal life insurance requires an extra investment license to sell. Any insurance product that can have a negative investment return requires these additional certifications by the agent. Therefore, not all insurance agents are able to sell index variable universal life to their customers.

Index Variable Universal Life (IVUL) Insurance Pros and Cons List

Index variable universal life has a lot of pros and cons. Below is a list summarizing both.

Index Variable Universal Life vs. Other Life Insurance Products

Index variable universal life is a hybrid of index UL and variable UL insurance products. IVUL has a cash value account that is credited interest based on the performance of an underlying fund similar to IUL.

However, unlike IUL, index variable universal life can have a negative return similar to VUL. But by sharing in some downside, the customer has much higher upside than a capped IUL has.

There are many types of insurance products and below is a brief explanation of each. (If you want a deeper explanation, you can read about the types of life insurance here)

• Term Life Insurance: Term insurance has a set period of coverage with a maturity date. Typical term has a level premium over a 10 to 30 year period and pays a fixed death benefit. Since the policy matures and may not pay a death benefit, term is generally the least expensive and simplest type of life insurance. However, there are ways to potentially extend your term coverage.
• Whole Life Insurance (WL): WL is the traditional permanent life insurance product that has fixed premiums with scheduled death benefit and cash value growth. WL offers less flexibility than index variable universal life, but less uncertainty.
• Guaranteed Universal Life (GUL): GUL is similar to a high-yield savings account with death benefit protection. You have a modest interest crediting rate and guaranteed minimum account value growth.
• Variable Universal Life (VUL): VUL policies allow for investing your separate account directly into equity markets. This allows for high potential upsides but all the potential negative returns of equities.
• Index Universal Life (IUL): IUL policies credit the account value based on an underlying fund similar to index variable universal life. However, IUL has a floor return of at least 0% and a cap that is much lower than IVUL.

There are tradeoffs with each type of insurance product. Additionally, every insurance company has their own versions of these products with difference between them. Many insurance companies even offer different versions of the same type, like an accumulation VUL and protection VUL that have different benefits and cash value growth potential.

Is Index Variable Universal Life Insurance (IVUL) A Good Investment For You?

Index variable universal life can provide a lot of benefits to you and your dependents. However, it comes with high premiums and fees for these benefits. There is a potential that your account value returns are negative and your cash value growth is much less than illustrated. Additionally, in weaker markets you may need to make extra unplanned premium contributions or face your policy lapsing and losing coverage.

There are riders that allow for secondary guarantees like no-lapse guarantees. These can help provide some stability by keeping your policy from lapsing in poor markets. However, these riders come with their own fees, which can be a drag on account value growth.

Your insurance needs are specific to you and you should work with an advisor and do your own research to see if index variable life is right for you.

Index Variable Universal Life vs. 401(k) Plan

Most people have 401(k) plans through their employer. A 401(k) comes with its own advantages and drawbacks that make it important to consider when looking at your personal financial situation.

Major benefits of 401(k) plans include lower fees, more investment options, potential employee match, and ease of use. However, when you are starting out, your 401(k) may not be sufficient to cover you dependents needs if you die unexpectedly. Index variable universal life has a death benefit in addition to your cash value account.

Although index variable universal life has structured payouts that may limit your downside while keeping your upside, the high fees may be a drag on account value growth.

The Final Word

Index variable universal life insurance can be a valuable part of your personal financial portfolio. Life insurance is one of the main assets in the protection pillar of your 5 pillars of personal finance. An Index variable universal life product may provide you the death benefit coverage you need with potential cash value growth that fits your risk tolerance.

Registered index variable universal life is still relatively new with Nationwide being one of the first companies to file for an IVUL product. But due to the success of index variable annuities (IVA also called registered index linked annuities or RILAs), many other companies are coming out with their own registered index variable universal life products.

Life insurance can be expensive and are complex. Index variable universal life with its unique structured returns and riders can be especially confusing. As such, it is important to work with an experienced life insurance agent or broker to help you decide if index variable universal life (IVUL) is right for you.

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