What’s important in life insurance?
All sorts of features make a difference in life insurance policies. Still, one underlying principle is to understand your various options and how they work.
Let’s talk briefly about an option called ‘indexed universal life insurance’ and what that means for policyholders. When people are shopping, they want to understand the jargon and the terminology to make informed decisions.
Life Insurance and the Stock Index
Why connect life insurance to the stock market at all?
The indexed life insurance product has to do with determining certain kinds of gains on life insurance accounts.
First, you can look at the three fundamental parts of the life insurance policy premium payouts:
- Death benefit
- Administrative costs
- Cash value position
After you account for contributing to both of the first two categories, you have what’s left in cash value.
That’s where you relate those monetary gains to the stock market index, whether it’s the S&P 500 or some other vehicle. In other words, the cash value, as the policyholder pays in money, gains more or less according to the index activity (and the market context around it.)
That’s really the crux of the whole thing – that the index is, in some core ways, a bellwether for the rest of the market.
A Floor and a Cap
Many of these are also subject to a floor and a cap – or a minimum/maximum. The capital gains on the policy cash value position will be bounded at the bottom by a minimum amount and capped at the top by a maximum you can recoup.
Again, this will be based on market activity reflected by the market’s volatility and whatever drives it, including current events, corporate changes, and investor sentiment. Burton Malkiel called it a “random walk on wall street” for a reason – and that has an application to how these products work.
Indirect Investment
It’s important to note that with indexed life insurance, you’re not investing directly in the stock market index.
Instead, the index is a guide for the kinds of gains or interest accumulation that the cash position experiences.
For instance, when the S&P 500 rises by a certain amount, you’re going to see that reflected indirectly in your cash position.
All of this can be looked at with a sort of a birds-eye view that clearly illustrates how a product like this makes life insurance capital like investment capital, which changes based on changes to the index.
Look for all of this and more at Jasso Group. We help with life insurance, health insurance, annuities, and more. When it comes to “benefits” and how to choose, how to frame these decisions, and how to move ahead, you need a skilled and professional partner to explain everything about these markets. That’s us!
