How do indexed universal life insurance policies work?

Indexed universal life insurance policies are designed to combine a death benefit with a cash value component that is linked to a stock market index, such as the S&P 500. This innovative approach allows the policyholder to potentially benefit from the growth in the stock market without directly investing in stocks.

The cash value in these policies earns interest based on the performance of the chosen index. However, it is important to note that there is typically a cap on the maximum interest rate that can be earned, as well as a floor to protect against market losses. This feature offers policyholders a balance between growth potential and protection, making it appealing for those who seek both life insurance and a savings component that can grow over time linked to market performance.

In contrast, some alternatives mentioned do not accurately reflect the nature of indexed universal life insurance. Fixed interest rates pertain more to whole life policies. Policies without a cash value component do not share the characteristics of indexed universal life insurance, nor do those that are entirely investment-driven. The unique structure of indexed universal life policies thus provides both insurance coverage and an opportunity for cash value accumulation tied to market indices.