What is indexed whole life insurance?
If you’re shopping for a permanent life insurance policy, it’s important to review your coverage options, including indexed whole life insurance. This policy is a type of life insurance coverage that combines elements of traditional whole life insurance with the potential for cash value growth linked to the performance of a stock market index.
With indexed whole life insurance, the policyholder pays premiums into the policy, and a portion of those premiums are allocated to a fixed interest-bearing account, similar to traditional whole life insurance. The remaining portion is allocated to an indexed account, which earns interest based on the performance of the chosen stock market index.
The policy's cash value has the potential to grow based on the positive performance of the indexed account up to a certain cap or participation rate, which is set by the insurance company. One benefit of this structure is that even if the stock market index performs poorly, the policy's cash value is not affected negatively as it is protected from market downturns. Keep reading to review the advantages and disadvantages of indexed whole life insurance to decide if this policy type is right for you.
Advantages of Indexed Whole Life Insurance
Indexed whole life insurance offers several advantages that make it a good fit for individuals seeking both life insurance coverage and a potential for cash value growth. Some of the key advantages of this type of policy include:
Cash Value Accumulation: Indexed whole life insurance provides the opportunity for cash value growth over time. The policy's cash value can increase based on the positive performance of the chosen stock market index, allowing policyholders to potentially build more wealth within the policy.
Protection from Market Downturns: Unlike other investment options tied directly to the stock market, indexed whole life insurance offers protection from market downturns. Even if the stock market index performs poorly, the policy's cash value will not decrease, providing a level of stability and peace of mind.
Tax Advantages: Similar to other types of permanent life insurance, indexed whole life insurance offers potential tax advantages. The policy's cash value grows on a tax-deferred basis, meaning policyholders do not pay taxes on the growth until they withdraw or borrow against it. Additionally, the death benefit is generally tax-free for the beneficiaries.
Lifetime Coverage: Indexed whole life insurance provides coverage for the policyholder’s entire lifetime as long as premiums are paid. This means that beneficiaries are guaranteed to receive a death benefit upon the insured's passing, which can provide financial protection and support for loved ones.
Flexibility: Indexed whole life insurance policies often come with various options for customization. Policyholders may have the ability to adjust premium payments, death benefit amounts, and the allocation of funds between the fixed and indexed accounts to suit their specific needs and goals.
Disadvantages of Indexed Whole Life Insurance
While this type of policy offers a variety of perks, there are also some drawbacks to choosing this type of coverage, including:
Higher Premiums: Indexed whole life insurance policies generally come with higher premiums than traditional whole life insurance. This is due to the additional costs associated with providing the potential for market-linked growth.
Surrender Charges: In the early years of an indexed whole life insurance policy, surrender charges may apply if you decide to cancel or surrender the policy. These charges can significantly reduce the cash value you receive if you terminate the policy within a certain period.
Potential for Losses: While indexed whole life insurance policies aim to protect against market downturns, there is still the possibility of lower or negative returns if the stock market index performs poorly. In such cases, the policy's cash value may not grow as expected.
Policy Restrictions: Indexed whole life insurance policies may come with certain restrictions, such as limitations on withdrawal options or changes to policy features. It's important to carefully review the policy's terms and conditions to understand the limitations and restrictions that apply.
When deciding on a life insurance policy, it’s important to understand both the benefits and disadvantages of your coverage options so you can ensure you find one that’s right for your budget and financial goals.
Let SelectQuote Find the Right Indexed Whole Life Insurance Coverage for You
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