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Indexed Universal Life

An Indexed Univeral Life Policy is a permanent cash-value policy where the client has the option to allocate the cash value portion to either a fixed stated interest amount or to an option on a market index like the S&P 500.

In any given year, the policy owner can choose to allocate some or all of his cash values away from the fixed interest option and into an "indexing" option. "Indexing" is a principal protection hedging strategy that allows the cash values to participate in general market gains while avoiding the downside. The insurance carrier buys options that are correlated to the S&P 500® and if the market goes up, the policy's cash values participate in the gains. However, if the market goes down, one does not participate. The catch? There is a "ceiling" set by the carrier, so if the market goes up over 13% for example, in any given year, the policyholder only participates up to 13%. But if the market is negative in any given year, there is a 0% floor. On each anniversary the gains are "locked in" and the policy's cash value is "reset" so that this becomes the new principal amount or "high-water mark" on which the subsequent year's gains will be calculated. Every year, there is a withdrawal of the cost of insurance and other policy charges.

This "indexing" strategy has averaged 8.1% annually over the past 30 years all without the risk of principal loss. After taking into account insurance costs, the net IRR on cash value over a 40 year period is over 7% (assuming a preferred health rating).


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