Indexed vs. Variable Life: Choosing the Right Product for Your Clients

  • Originally published December 20, 2011 , last updated December 16, 2015

Although Indexed and Variable life products are somewhat similar, the disparities between them are enough to create a gap in both the type of client who would be interested in the products and the potential for future sales.

Indexed universal life (IUL) is similar to variable universal life (VUL) in that the cash value of the product is linked somehow to the stock market. But that’s where the similarities end. IUL is a fixed, or “traditional,” universal life product, while VUL is a securities product. While VUL contracts allow clients to build an investment portfolio of equity and bond accounts, IUL policies do not invest directly in equities or bonds, so the potential for downside risk is not the same. IUL policies do this by basing the performance of the cash values on one of several indices. For example, an IUL policy may offer a choice between an index based on the S&P 500 or the Dow Jones Industrial Average.

Additionally, because the carrier assumes most of the risk, IUL products come with guarantees to protect against downside risk, while allowing for growth potential via the appropriate market index. In addition, at the end of the year, any increases in cash value are locked in, so there is no potential to lose any gains made. Conversely, variable products are tied completely to the stock market, losing or gaining value as the market fluctuates. Depending on the product design, VUL policies may have little or no guaranteed death benefits.

Indexed universal life and variable universal life products both have their pros and cons. By understanding the ups and downs of these products, you can design a plan tailored to your client’s individual needs.

VUL: More risk, higher return
Variable products are designed for the experienced investor. Many agents will refer to traditional whole life insurance as a “black box” product because there’s no telling what’s going on internally — full disclosure of the inner workings is something that only the actuaries know. Universal life was originally designed to offer a partial look into the black box by revealing most of the internal mechanics or costs of a life insurance policy. But with VUL, there is, for the most part, total disclosure of all fees and charges.

The bad news is that variable products place the risk entirely on the client. Typically, insurance companies bear all the risk with traditional coverage. They guarantee that, as long as a client pays their premium, they will see a return. However, with variable products, the client has a shared responsibility in setting up the investment side of the product. This can yield higher returns, but it can also lead to big losses if the market takes a turn for the worst. Therefore, it helps if the customer is somewhat familiar with investing and pays close attention to what’s happening with respect to their cash value. The client decides how much to deposit or pay into their VUL plan, and by monitoring the market carefully, they can make informed decisions.

VUL policies definitely have some risks, so they are ideal for clients who have more discretionary income, are concerned about handling their life insurance needs on a more permanent basis, and are willing to take some investment risk with the hope that there is sufficient upside potential.

Play it safe with IUL
Indexed universal life is a different product in the sense that it has guaranteed returns and provides much more stability. But there is still a good opportunity for growth via a stock index. IUL has all of the inherent flexibility of a traditional universal life plan; it has guarantees in growth and, perhaps, a death benefit. A client can’t lose money in a tumultuous market with an IUL as they might in a VUL, but they also may not see the kind of gain that they would with a VUL product. If growth potential with a safety net is a client’s main concern, this is the product for them.

IUL is excellent for college funding or retirement supplemental planning. If a client starts young and can afford to deposit more than the required premium in an IUL, the plan can provide both life insurance needs and cash values that can be used in other ways. With the growth of the cash values tied to a market index and the long investment horizon of someone young in age, it makes for a perfect opportunity to accumulate large sums of money.

For example, let’s say you have a 30-year-old client who buys a $250,000 policy and decides to pay $1,800 annually. About half of that is going into the S&P 500, so whatever the S&P 500 reaps that year, the client will get. When they turn 65, they can retire and stop paying the premium, and could draw out approximately $20,000 a year. Although the amount that they can withdraw is predicated on the market, any of the gains they make in their 35 years of investment are locked in, guaranteeing a substantial death benefit.

Where we stand
Whether you’re offering VUL or IUL, now is the time for your clients to buy. Since October 2007, most people have been shying away from investments, and with good reason: The market has been extremely volatile. But with the U.S. possibly at the tail end of this recession, you can be a little more optimistic about selling investment and securities products. No matter which product your client ultimately chooses, now is a perfect time to take advantage of the down-turn economy.

Call your life marketer at 1-877-888-0166 for more information.