Universal Life Insurance Texas TX
Reader’s Question:
My officemate happened to mention that his universal life insurance depends on the S&P 500. Is he joking?
Larry
Austin, TX
I’m afraid your officemate is not joking—bragging, more likely. He must’ve purchased an equity-indexed universal life insurance policy. This type of life insurance plans were introduced in the mid-1990s to offset the low interest rates offered by another type of universal plans which were introduced first, the interest-sensitive universal policies. The internal rate of return for your policy will not depend on prevailing interest rates in the money market but rather like your coworker said, on the performance of the stock market. Usually, it is the S&P 500 that’s made as benchmark by life insurance companies.
How does this work? For example, you purchased an equity-indexed life insurance today and the S&P500 index is at 1,000. Your insurer will record that value of the index which is at 1,000. Then on your anniversary, a year from now, your life insurance company will again record the S&P500’s closing value. Let’s say the S&P closes at 1,100. Your cash value gain would then be pegged at 10% for that year. And in case the S&P500 decreases in value from your base of 1,000, your cash value gain will be set to zero and not negative. So, your cash value either remains the same or you gain.
However, don’t count your gains yet in case you find out that after a year the index is at 2,000. You’re probably thinking that your cash value gained 100%. It’s not the way things work. You can only gain a maximum of 12%.
For more detailed information regarding equity-indexed universal life insurance, please contact your life insurance agent in Texas, and I’m sure he’d be happy to give you a quote.
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