KEY TAKEAWAYS

What Is Indexed Universal Life Insurance (IUL)?

Indexed universal life (IUL) insurance is a type of universal life insurance that provides a cash value component along with a death benefit. The money in a policyholder’s cash value account can earn interest by tracking a stock market index selected by the insurer, such as the Nasdaq-100 or the Standard & Poor’s 500. If your policy has a fixed-rate account, you can choose how much you want to go into each account.

Although the interest rate derived from the equity index account can fluctuate, the policy offers an interest rate guarantee, which limits your losses. It also may cap your gains. These policies are more volatile than fixed universal life policies, but less risky than variable UL insurance policies because IUL doesn’t invest in equity positions.

How Does Indexed Universal Life (IUL) Insurance Work?

As with universal life insurance, IUL policies have adjustable premiums. You can underpay or skip premiums, plus you may be able to adjust your death benefit. What makes IUL different is the way the cash value is invested.

When you take out an indexed universal life insurance policy, the insurance company provides several options to select at least one index to use for all or part of the cash value account segment of your policy and your death benefit. When a premium is paid on the account, a portion pays the cost of insurance based on the insured’s life; any fees are paid; and the rest is added to the cash value.

The total cash value is credited with interest based on increases in an equity index (although your money isn’t directly invested in the stock market).1 If you own an IUL policy, you can likely borrow against the accumulated cash value. However, if you don’t pay back your loans, they are deducted from the death benefit.2

Key Features

IUL insurance offers several features, including:13

• Permanent, lifelong coverage when premiums are kept up to date.
• Flexible premiums and a death benefit that may also be flexible.
• Cash value, along with the potential growth of that value through an equity index account.
• An option to allocate part of the cash value to a fixed interest option.
• Minimum interest rate guarantees (“floors”), but there may also be a cap on gains, typically around 8% to 12%.
• Accumulated cash value can be used to lower or potentially cover premiums without subtracting from your death benefit.

Some policies may allow the policyholder to select multiple 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 with the value at the end of the month. If the index increases during the month, interest is added to the cash value. The index gains are credited back to the policy, either on a monthly or an annual basis.

People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs as key person insurance for business owners, premium-financing plans, or estate-planning vehicles.

Example of Indexed Universal Life Insurance

Let’s say your selected index for your IUL policy 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, while other policies take an average of the daily gains for a month. No interest is credited to the cash account if the index goes down instead of up.

The index’s gains are credited to the policy based on a percentage rate, referred to as the participation rate.3 The rate is set by the insurance company and can be anywhere from 25% to more than 100%. (The insurer can also change the participation rate over the lifetime of the policy.) 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).

Advantages and Disadvantages of IUL Insurance

IUL insurance policies aren’t for everyone, but they’re a viable option for people seeking permanent life insurance with a cash component that earns interest plus a death benefit. It’s more expensive than term life insurance, but you get permanent coverage, and the death benefit is paid tax-free to your beneficiaries when you die.67 The policy’s value may increase due to the cash value component, and you may be able to borrow from your account. There are a number of pros and cons to consider before purchasing an IUL policy.

Advantages

• • Flexible premiums: As with standard universal life insurance, the policyholder can increase their premiums or lower them in times of hardship.1
  • Cash value accumulation: Amounts credited to the cash value grow tax-deferred.3 The cash value can pay the insurance premiums, allowing the policyholder to reduce or stop making out-of-pocket payments.1
  • Investment flexibility: The policyholder controls the amount risked in equity-indexed accounts, and the death benefit amounts can be adjusted as needed.1 Most IUL insurance policies offer a host of optional riders, from death benefit guarantees to no-lapse guarantees.
  • Death benefit: This is permanent, not subject to income or death taxes, and not required to go through probate.87
  • Less risk: The policy is not directly invested in the stock market, reducing risk.3
  • Easier distribution: The cash value in IUL insurance policies can be accessed at any time without penalty, regardless of a person’s age.
  • Unlimited contribution: IUL insurance policies have no limitations on annual contributions.

• Extended maturity date: Many IUL policies have a later maturity date than other universal life policies, with some ending when the insured reaches age 121 or more. If the insured is still alive at that time, policies pay out the death benefit (but not usually the cash value), and the proceeds may be taxable.9

Disadvantages

• • Caps on accumulation percentages: Insurance companies sometimes set a maximum participation rate that is less than 100%.
  • Better for larger face amounts: Smaller policy face values don’t offer much advantage over regular UL insurance policies.
  • Based on a variable equity index: If the index goes down, no interest is credited to the cash value. (Some policies offer a low guaranteed rate over a longer period.) Other investment vehicles use market indexes as a benchmark for performance. Their goal normally is to outperform the index. With IUL, the goal is to profit from upward movements in the index.
  • Growth doesn’t include stock dividends: Because the insurer only buys options in an index, you’re not directly invested in stocks, so you don’t benefit when companies pay dividends to shareholders.3
  • Management fees: Insurers charge fees for managing your money, which can drain cash value.1
  • Premium calls: Once your policy value grows enough to cover your premiums and other expenses, you can decide to skip or underpay premiums. If so, you should monitor your cash value regularly to make sure the cash value remains to cover those costs. Otherwise, the insurance company can require you to add more funds to prevent the policy from lapsing.
• Tax consequences of loans and withdrawals: If you withdraw money that includes investment gains before your policy matures, you could face income taxes on those funds. If your policy lapses with an outstanding loan, the loan could also become taxable.10

The Bottom Line

Indexed universal life (IUL) insurance offers cash value plus a death benefit. The money in the cash value account can earn interest through tracking an equity index, and some is often allocated to a fixed-rate account. However, Indexed universal life policies cap how much money you can accumulate (often at less than 100%), and they are based on a possibly volatile equity index.

Beyond the death benefit offered, IUL policies shouldn’t be considered optimum retirement savings vehicles. A 401(k) is a better option for that purpose because it doesn’t carry the high fees and premiums of an IUL policy, plus there is no cap on the amount you may earn when invested. Most IUL policies are best for high-net-worth individuals seeking to lower their taxable income.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.

 KEY TAKEAWAYS

Homeowners insurance and mortgage insurance can both add to the cost of owning property, and you’re likely to encounter both during the mortgage process. However, that’s where their similarity ends.

Homeowners insurance protects your home and its contents, while mortgage insurance, also called private mortgage insurance (PMI), protects your mortgage lender in case you default on your mortgage payments. Understanding these differences can aid in making informed financial decisions during the mortgage process.

Comparing Homeowners Insurance and Mortgage Insurance

Though homeowners insurance and mortgage insurance sound similar, the two have distinct differences.

What Is Homeowners Insurance?

Homeowners insurance is a form of property insurance designed to protect your home and its contents from damage caused by unforeseen events. In addition, most homeowners insurance shields you from lawsuits if someone gets hurt on your property. It also insures your home and property from damage- or loss-related expenses.

A homeowners insurance policy may include coverage for your:

• Home’s structure
• Personal belongings
• Liability in lawsuits for injuries that you, your family members, and pets cause to other people
• Medical expenses if someone is hurt in your home
• Extra living expenses while your home is uninhabitable

However, standard homeowners insurance policies come with limits, typically excluding damage caused by natural events like floods, mold, earth movements such as earthquakes and landslides, and sewer or drain backups or overflow.1

What Is Mortgage Insurance?

Mortgage insurance, or private mortgage insurance (PMI), is very different. Mortgage insurance is designed to protect the lender or bank in case you fail to make your mortgage payments.

With PMI, the homeowner normally pays a percentage of their total mortgage cost each year. Then, if they are unable to make mortgage payments, the insurance company will pay the lender on their behalf. Adding PMI to your monthly bills can raise the cost of owning a house.2

Key Differences

The key differences between these two types of insurance can be summarized as follows3.4

Do You Need Homeowners Insurance or Mortgage Insurance?

Which type of insurance you need depends on the type of mortgage loan, the size of your down payment, and how close you are to paying off your mortgage.

When Is Homeowners Insurance Necessary?

Most homeowners have some kind of homeowners insurance since mortgage lenders often require this insurance to approve a mortgage. Lenders want to be protected in case your home is irreparably damaged or destroyed. The mortgagee clause accomplishes this by requiring the insurance company to pay the lender.

However, many people maintain their homeowners insurance for its benefits long after their mortgage loan has been paid off.

Homeowners insurance can make good financial sense because of the high replacement cost of homes and costly lawsuits. Monthly premiums can be much less than you would ever have to pay to rebuild your home or replace all your possessions in the event of a covered disaster or if you’re sued because a visitor got hurt.1

Is Mortgage Insurance Required for Your Loan?

Depending on the lender, borrowers are typically required to take out mortgage insurance when they supply a down payment of less than 20% of the home’s purchase price. Private mortgage insurance (PMI) applies if you’re taking out a conventional loan or refinancing your home and the equity is less than 20% of its value. For Federal Housing Administration (FHA) mortgage loans, a mortgage insurance premium (MIP)—the equivalent of PMI—is always required.

Lenders require PMI because they regard mortgages backed by less than a 20% down payment as risky, and they want protection in case you can’t meet your payments.

However, you can usually cancel your PMI once you’ve paid off enough of the loan that it reaches 80% of your home’s original value. This valuation is defined by its contract sales price or appraised value at purchase (whichever is lower). You must have a history of on-time payments and be up to date with your payments when requesting cancellation.5

Loans backed by the FHA have their own rules. Depending on your loan-to-value (LTV) ratio when you took out your FHA loan, your loan terms may require you to maintain your MIP for 11 years or the length of your mortgage.6

The Bottom Line

As you work through the mortgage process, you’ll likely encounter both homeowners insurance and mortgage insurance, which are different. Homeowners insurance protects your home, its contents, and you in case of lawsuits. Mortgage insurance, also called PMI, protects your lender in the event that you can’t meet your mortgage payments.

Homeowners insurance can make good financial sense because it protects you from unexpected costs. You will be required to purchase PMI on top of your mortgage if your down payment is less than 20% or if you take out an FHA-insured mortgage.

Both can contribute significantly to the cost of homeownership but having them can be critical in some situations.

KEY TAKEAWAYS

You can obtain dental insurance under the Affordable Care Act (ACA), either as part of a health plan or as a stand-alone product, through the Health Insurance Marketplace.

You can compare and enroll in dental plans at the ACA portal: HealthCare.gov.

Dental coverage in the ACA framework is considered essential for children (up to age 18), but not for adults.

Two levels of dental coverage are offered in the Marketplace: high and low. The former has higher premiums but lower co-payments and deductibles, while the latter has higher co-payments and deductibles but lower premiums.

Understanding the Affordable Care Act (ACA)

The Patient Protection and Affordable Care Act was signed into law by then-President Barack Obama in 2010.1 The law intended to improve health outcomes, lower costs, and ensure that more Americans can obtain medical health insurance.

The law’s constitutionality was challenged in courts and Congress, with conservatives and labor unions seeking to repeal it. The U.S. Supreme Court upheld the law in June 2021.2

Despite this, some of the rules have changed. For instance, the annual enrollment period changed, and the tax penalty on uninsured individuals was eliminated.3 At different times, efforts to promote and support the program have been curtailed and expanded, depending on the priorities and beliefs of the presidential administration. If you want to use HealthCare.gov to obtain coverage, be sure to find out the dates of the next enrollment period.

Exploring Dental Plan Categories Under the ACA

Some of the general health insurance options available through the Health Insurance Marketplace may include dental care. If not, you can choose to add a stand-alone dental insurance plan. This requires you to pay a separate premium. In any event, you must enroll in a health plan to obtain access to a stand-alone dental plan.

There are two categories of Obamacare dental insurance plans: high and low.

• The high coverage level has higher premiums but lower co-payments and deductibles. You’ll pay more every month but less when you use dental services.
• The low coverage level has lower premiums but higher co-payments and deductibles. You’ll pay less every month but more when you use dental services.4

When you compare dental plans in the Marketplace, you’ll find details about each plan’s costs, co-payments, deductibles, and services covered.

Comparing Dental Coverage for Children and Adults Under the ACA

The ACA treats dental insurance differently for adults vs. children ages 18 and younger.

For children, dental coverage is considered an essential health benefit. This means that if you’re getting health coverage for someone 18 or younger, dental coverage must be available for your child either as part of a health plan or as a stand-alone plan.

For adults, dental coverage isn’t considered an essential health benefit. This means that insurers don’t have to offer dental care as part of their health plans to people over age 18.4

How to Enroll and Maintain Your Dental Insurance

If you want dental insurance, the Health Insurance Marketplace provides a way to check options and compare prices. If you sign up for a stand-alone dental plan, remember that you’ll be billed separately for the coverage.

If you wish to cancel your dental insurance for whatever reason (say, if you get a job that gives you coverage), you may be able to do so, depending on the type of coverage. You can cancel your plan anytime if you enrolled for separate coverage. If your Marketplace health insurance plan comes with dental coverage, you cannot opt out of it. You may, however, make changes to your plan so that the new one doesn’t cover dental procedures.

The Bottom Line

The Affordable Care Act (ACA) has options for dental care. So, if you find yourself without dental insurance, you can sign up for it when you need healthcare coverage.

Remember that you can choose a healthcare plan that includes dental coverage, or you may be able to pick a separate plan. But you can’t get just dental insurance—stand-alone dental plans require enrollment in a health plan.

Two other things to remember about Health Insurance Marketplace dental plans:

• Two tiers exist: high (higher premiums but lower co-payments and deductibles) and low (lower premiums but higher co-payments and deductibles).
• Dental coverage is an essential health benefit for children ages 18 and younger, but not for adults.

Go to the HealthCare.gov dental page to find and compare dental plans available in your area and enroll in one if you choose.4