Should you bet your life insurance policy on the stock market?
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The stock market is doing … really well. The S&P 500 rose more than 28% in 2019. The longest-running bull market in history could turn 11 in March.
Can your life insurance policy grow with the market?
Indexed universal life insurance accounted for 25% of all individual life insurance premiums sold in the first nine months of 2019, based on a survey by LIMRA, a financial research firm. These policies seem too good to be true, offering high returns on your policy as well as protection against losses. But is there a downside?
Indexed universal life insurance is a type of permanent life insurance. These types of life insurance are intended to last the entire lifetime of the holder and are more complex than term life insurance, which expires after a set amount of time.
A quick explainer: Whole life insurance policies are often considered an investment that can grow over time. They can have two parts: a death benefit, which pays out if you pass away, and a cash value that can increase in value over time.
What makes indexed universal life insurance different from other whole life policies is a minimum guaranteed interest rate, also known as a floor (usually 0%). They commonly also have a cap, such as 9% (so even if the underlying index has a 15% return, the policyholder is only credited 9%). These interest rates aren’t fixed — they are tied to an index, like the S&P 500, chosen by the insurer.
With indexed universal life insurance, you aren’t directly investing in the market, but your insurer uses the interest rate of a chosen index to decide how much interest your policy accrues.
Sounds like a good idea, right? There are some drawbacks.
Indexed universal life insurance is typically more expensive than term life insurance. There are also a number of complications involved with this type of policy.
The biggest pitfalls? Extra fees over time, which can lead to policy lapse if additional premiums are not paid.
“It’s usually not sustainable in the later years due to the increased cost of insurance at older ages, as the actual cost of insurance isn’t fixed,” said Eric Ngai, senior life insurance sales associate at Policygenius.
In a bull market, your policy’s cash value builds up over time, which covers regular insurer fees. But the fees typically get larger as you age. If the stock market turns south, the interest rate could fall while the fees increase.
“If markets go bad, the premiums can jump or the policy can lapse,” said Ngai.
Learn more about if life insurance is a good investment here.
For some, whole life insurance is a smart bet. If you have an estate to protect, for example, it may be important to have permanent life insurance coverage.
But for most, term life insurance is a more affordable and simpler option. An outside investment plan may also get you higher returns and cost less than indexed universal life insurance.
Do your research and review your options before buying. Consider talking to a broker to help understand your policy — we can help you compare plans here.
Image: Ralph Hopewell Anderson
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