Understanding Equity Indexed Life Insurance

May 03, 2018

 
 

Trying to decide whether you should buy life insurance can be a very confusing experience for many people. This is not least because there are so many insurance covers to choose from; universal life, whole life, term life, the list is endless.

Each type of life insurance has its pros and cons. Equity Indexed Universal Life insurance is also known as EUIL and is one other option in the list of life insurance covers.

So, what is An Equity Indexed Life Insurance Cover?

An EUIL is not only a life insurance policy but is also a tool of financial planning. Remember that a life insurance policy is an agreement between the insurance company and the insured person.

The contract states that upon the death of the insured person, the insurance company, will pay a specific amount of money also referred to as a death benefit to the policy’s beneficiaries.

This only applies though if the policy owner, that is, the person who pays the premiums, has been meeting their obligations.

Here are some of the benefits you stand to gain if you buy an EUIL.

Death benefit for those left behind

The purpose of taking a life insurance policy is so that in the event of the policy owner’s death, their beneficiaries will still be taken care of.

When a person is purchasing an EUIL one of the things they need to take into serious consideration is the amount of the death benefit. Basically, you would need to understand how much future income is required to keep your beneficiaries going against how much you can currently afford to put aside for premium payments.

The advantage of taking an EUIL cover is that the death benefit is usually tax-free.

Has Investment Returns

Not all of the premiums paid in an EUIL goes to the death benefit, some of it gets re-invested. The more money the policy holder has invested in their account the more likely that they will be able to access funds through a loan.

The policy holder determines how the money in the investment account grows by choosing from a selection of index funds that is based on their life expectancy and their risk tolerance. The most you can expect back on the investment made is approximately 16% though it differs from one insurance company to the next.

Tax Benefits

This is one EUIL aspect that has made it very popular with insurance holders. Most policy holders usually begin taking out their investment funds around retirement age. When they do the withdrawal is usually tax-free.

Unlike traditional IRA or 401K, an EUIL usually has after-tax funds. This means that the cash balance indicated on the balance is exactly what you end up getting.

When a policy holder withdraws money from an EUIL investment account, they agree that they will pay back the funds plus interest. Here’s the catch though, there are no penalties for not paying back the loans.

However, the death benefit reduces with every cash withdrawal.

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