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California Indexed Universal Life Insurance

What if you could get the flexibility of adjustable premiums and face value, and an opportunity to increase cash value; would you go for it? What if you could get this without the inherent downside risk of investing in the equities market? It's your lucky day: All of this is possible with an Indexed Universal life insurance policy.

Life is always uncertain, and no one can predict the outcome of every event in his or her own life. We deal with this uncertainty every day, and face risks every time we wake up in the morning. We do what we can to limit the amount of risk that we face, but not everything can be avoided. Because of this risk, it’s important that we ask ourselves, “Will my family be taken care of if I were to pass away?&rdquo Do I have sufficient life insurance coverage to support my family in the event that the unforeseen occurs?

It can be confusing when trying to decide what type of life insurance coverage to get, especially when people’s financial needs are constantly changing. The index universal life insurance product (or IUL,) is one type of life insurance that has the flexibility to meet the demands of people with changing wants and needs.

An index universal life policy has some benefits to it that make it ideal for many people. Index Universal Life is built on a universal life chassis. So virtually all the same aspects and advantages that applied to universal life also apply to index universal life. Those advantages include complete transparency, premium options, flexible death benefits, death benefit options and cash value withdrawal options.

The prime difference between universal life and index universal life is the interest rate credited to the cash value portion of the policy with an index policy is based on an “index” rather than on the interest rate declared by the insurer. An index is a culmination of companies that are used to gauge the overall sentiment of the economy. If the particular index earns interest, the policy holder will be “credited” that interest. However, if the index loses value there is commonly a guaranteed minimum that will be credited to the policy. Guarantees are provided by the insurance company.

What Is Indexed Universal Life Insurance

Indexed univeral life insurance is a lot like universal life insurance, however it does have a couple of wrinkles not found in traditional universal insurance policies. Universal life insurance comes in many different forms, from your basic fixed-rate policy to variable models that allow the policy holder to select various equity accounts in which they can invest. An indexed universal life insurance policy gives the policy holder the opportunity to allocate cash value amounts to either a fixed account or an equity index account. Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100.

Indexed policies allow policy holders to decide the percentage of their funds that they wish to allocate to fixed and indexed portions. Also, these types of universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policy holder can receive in said account. Since these policies are seen as a "hybrid" universal life insurance policy, they are usually not very expensive and are safer than an average variable universal life insurance policy.

How Does It Work

When a premium is paid, a portion pays for annual renewable term insurance based on the life of the insured. Any fees are paid, and the rest is added to the cash value. The total amount of cash value is credited with interest based on increases in an equity index (but it is NOT directly invested in the stock market). Some policies allow the policyholder to select multiple indexes. IULs usually offer a guaranteed minimum fixed interest rate and a choice of indexes. Policyholders can decide the percentage allocated to the fixed and indexed accounts.

The value of the selected index is recorded at the beginning of the month and compared to the value at the end of the month. If the index increases during the month, the interest is added to the cash value. The index gains are credited back to the policy either on a monthly or annual basis. For example, if the index gained 6% from the beginning of June to the end of June, the 6% is multiplied by the cash value. The resulting interest is added to the cash value. Some policies calculate the index gains as the sum of the changes for the period. Other policies take an average of the daily gains for a month. If the index goes down instead of up, no interest is credited to the cash account. The gains from the index are credited to the policy based on a percentage rate, referred to as the "participation rate". The rate is set by the insurance company. It can be anywhere from 25% to more than 100%. For example, if the gain is 6%, the participation rate is 50% and the current cash value total is $10,000, $300 is added to the cash value [(6% x 50%) x $10,000 = $300].

How Your Premium Is Allocated

Premium may be received at different times, so IUL plans use Index Segments .Each premium payment is handled as a separate bucket. A policy with monthly premiums could have a minimum of 12 different buckets, that’s 12 different index starting points and 12 different possible credited interest rates and 12 different annual reset points to start the next Index Period

Credit Index

The Index Credit, if any, is added to the Index Segment(s) on the Index Crediting Date, which is the business day that falls on or immediately follows the Index Period’s end date.*

At the end of an Index Period, a new Index Period will begin and any values in an Index Segment will remain in the same Index Segment, unless you decide to make changes. The index value used for the start date of the new Index Period will be the same as the index value used for the previous Index Period’s end date.

It is possible to have an Index Period’s end date and a new Index Period’s start date fall on a weekend or business holiday. However, the index value used in the calculation of the Index Credit will be the index value on the close of the next business day.

* Failure to meet premium requirements may result in a lapse in the policy and participation in the Index Accounts. The Index Accounts are subject to caps and participation rates. In no case will the interest credited be less than zero percent. Please refer to the customized illustration provided by your agent for additional detail.

What is Annual Reset?

IULs contain an annual reset design. This means that each year’s credited interest is locked in on the Index Crediting Date and a new starting point is determined, which is called the “annual reset.” The interest credited can never be taken away due to negative index performance and it will participate in future growth, giving you the advantage of compounding interest in future years.

Available Index Options

All plans offer index options that allow you to customize a plan that’s right for you. While you don’t invest directly in an index, you may choose an index that will be used to calculate the credited interest rate for your policy. Below are the indices available. Availability may differ based on product:

• The Standard & Poor’s 500® Composite Stock Price Index (S&P 500®).
• The Standard & Poor's 400® Index (S&P MidCap 400®).
• The Dow Jones Industrial Averagesm Composite Stock Price Index (DJIAsm).
• The NASDAQ-100® Stock Price Index (NASDAQ-100®).
• The EURO STOXX 50®.
• The Russell 2000® Index.

You can choose to allocate premiums to the indices listed above (subject to availability) in any combination. You may also allocate premiums to the Fixed Account.

Deciding on Index Selections

You can put premium into a single index selection or any combination of the available indices based on your preferences. Remember, you can always change your premium allocations at any time and you can transfer money between different index selections at the end of the index period for each Index Segment.

When deciding where to allocate your premium, you may want to consider using more than one index selection. When you allocate to more than one index selection, you can benefit if one index performs well while others perform poorly.

When choosing index selections, you should consider the index participation rate and the index cap rate (if applicable). These items will determine how much of the index growth you will receive, and the possible limit to the upside potential of the index.

What's Good About a UIL Policy?

  • Low Price: The policyholder bears the risk, so the premiums are low.
  • Cash Value Accumulation: Amounts credited to the cash value grow tax deferred. The cash value can pay the insurance premiums, allowing the policyholder to reduce or stop making out-of-pocket premiums payments.
  • Flexibility: The policyholder controls the amount risked in indexed accounts vs. a fixed account; the death benefit amounts can be adjusted as needed. Most IUL policies offer a lot of optional riders, from death benefit guarantees to no-lapse guarantees.
  • Death Benefit: This benefit is permanent.
  • Less Risky: The policy is not directly invested in the stock market, thus reducing risk.

Riders

A provision of an insurance policy that is purchased separately from the basic policy and that provides additional benefits at additional cost. Standard policies usually leave little room for modification or customization, beyond choosing deductibles and coverage amounts. Riders help policyholders create insurance products that meet their specific needs.

Protected Death Benefit

The Protected Death Benefit is an excellent option for clients who will use their policy to supplement their income, but also desire the guarantee of a specific death benefit amount upon their death. In some cases, clients may determine that they do not require the level of death benefit coverage as originally issued on the policy. The guarantee provided allows the client to choose their minimum death benefit amount, while they continue to access their accumulated policy values through loans or withdrawals.

Waiver of Surrender Charge Option

Election of this option can help your clients avoid costly surrender charges should the need to surrender the policy arise. When the Waiver of Surrender Charge Option is selected, it can create greater cash value accumulation in the beginning policy years (less the monthly cost).

• Surrender charges will be waived unless the policy is surrendered as a 1035 Exchange and sent to another company.
• Option must be selected at the time of application.
• Available for an additional charge of $.03-.08 per $1,000 per month for 14 years from issue and from each increase, depending on issue age and risk class.
• Feature allows certain substandard underwriting rates (known as “table ratings”) to be improved to a “standard” rating. A standard rating generally indicates average health and involves a lower life insurance premium than substandard ratings. Qualifying rated cases through Table 4 will be classified as Standard.
• Qualifying rated cases include policies up to $5 million for ages 0-75 and policies up to $1 million for ages 76-80.

Accidental Death Benefit Rider

Provides additional benefit for the insured if death is caused by an accidental bodily injury and occurs within 90 days of the injury. This rider may not be available with certain health conditions or hazardous sports.

Children’s Term Rider

This rider provides term coverage on all children of the base insured, natural or legally adopted, who are at least 15 days old.

Waiver of Monthly Deductions Rider

The Waiver of Monthly Deductions Rider waives monthly COIs, monthly loads, administrative fees, percent of account charges, and any other rider charges, after the insured has been totally disabled for six months. Waiver is not available on policies with substandard ratings.

No Cost Benefits

The following riders are automatically included on policies at no additional premium costs, if eligible

Accelerated Benefit Endorsement

Provides access of up to 75% (maximum $250,000) of the policy’s specified amount without penalty, if the insured is diagnosed with a terminal illness, which would likely result in death within 24 months.

Chronic Illness Accelerated Benefit Rider

This accelerated benefit rider advances a portion of the death benefit if the insured is chronically ill, which is defined as permanently unable to perform at least two of the six Activities of Daily Living or has a severe cognitive impairment. The rider is not available to insureds over issue age 75, or on insureds rated higher than Table 4 or on policies that contain medical flat extras. An administrative fee is required at the time of election. Additional exclusions and limitations apply. May not be exercised at the same time as the Accelerated Benefit Endorsement.

ca indexed universal life insurance

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