INDEXED UNIVERSAL LIFE POLICIES: WHAT YOU NEED TO KNOW BEFORE YOU BUY

Indexed universal life policies have become an attractive option for many people, but insurance regulators have begun to look more closely at this type of instrument. Indexed policies allow the policyholder to allocate some portion of the policy’s cash value to an equity index account, and there is a cap on the maximum return the policyholder can receive.

 Jason Konopik, CFO AMZ Financial Services, LLC

Jason Konopik, CFO
AMZ Financial Services, LLC

AMZ Financial’s CFO Jason Konopik explains that regulators were concerned about the lack of commonality in the rates of return used as illustrations to prospective buyers. Not all agents “push the envelope” in trying to tell buyers what is possible. But merely the possibility that an agent would do so caused concern for regulators.

Indexed life policies are relatively inexpensive because of the lack of regulation. The best way to explain such a policy might be to correlate it to the interest rates on CDs. Konopik opines that the indexed life policy is a relatively safer investment option than some others, such as variable universal life policy, a typical 401(k), or “a basket of mutual funds.” The indexed life policy is somewhat like an annuity in that it protects against the downside and can offer a reasonable upside.

The majority of indexed life policies are indexed to the S&P 500. There are also some more exotic strategies where the premiums are allocated to perhaps three indexes to provide diversification. The ideal client base for these policies is people between ages 40 and 55. For those individuals, mortality costs are still fairly low, and these individuals will probably let the policy alone for several years before they begin drawing down proceeds or taking policy loans (ten years is probably a minimum time to let the policy “bake” before taking money out).

Prospective buyers should ask what assumptions an agent is making in illustrating how it will perform and how the money can be gotten out of the policy (loans or withdrawals) and what will the loans cost. Consumers should also ask what other benefits come along with the policy. For example, what kind of death benefits are provided with the policy?

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