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Why (and how) insurers are combining whole life with indexed universal life

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Today’s insurance product marketplace is flooded with options, leaving most clients familiar with the overwhelming feeling that they must choose one. Insurance carriers, however, have answered this issue with product innovation — and the next product trend may be one that allows clients to combine the guarantees of traditional whole life insurance with the upside participation potential of an indexed universal life insurance (IUL) product. 

Understanding the details of these new products can help clients experience the best of both worlds, eliminating the need to choose between valuable features by combining elements of both into a single, optimal value product.

IUL versus whole life

A whole life insurance policy is a permanent policy that provides for a guaranteed death benefit on the death of the insured in exchange for set, guaranteed premium payments. The carrier issuing the policy invests a portion of the premiums, building cash value in the policy that the insured can borrow against in the future. These policies also typically provide annual dividends, which can be used to further build the cash value of the policy.

Indexed universal life insurance policies, on the other hand, are cash value life insurance products that are tied to a specific stock index (or indexes, such as the S&P 500) and provide returns based upon a formula that is correlated to market performance. These policies often come with both an earnings cap and an earnings floor, so that, for example, the policy might earn no more than 10 percent but no less than 2 percent, meaning that the policy can continue to grow even in an economic downturn.

Clients who are interested in the market participation and downside protection investment components of indexed universal life may, however, also be drawn to the guarantees provided through a traditional whole life policy.

The new product mix

Life insurance carriers have been searching for ways to combine the benefits of a whole life insurance product with the market participation options offered through indexed universal life. These new options use a currently existing whole life feature — paid up additions (PUAs) — in order to add an indexing feature.

Essentially, a paid-up addition is an additional death benefit (also with cash value) that is purchased in conjunction with a whole life policy (either with dividends or through additional premium payments). Carriers, understanding the attraction of an indexed product, have begun offering paid up additions that can be tied to the performance of an index. 

These PUAs are offered as a product rider that is tied to a whole life product that offers the guaranteed death benefits, premiums and a cash value component, as discussed above.

Like a traditional indexed universal life insurance product, the PUA itself has both an upside participation cap and a floor to provide downside protection.

The client is able to choose the proportion of the paid up addition that is allocated to the indexed portion of the product, tying as little as zero percent and as much as 100 percent of the PUA to the index performance. The product also allows the client to adjust the initial allocation in the future, providing the flexibility that many clients have come to expect.


The life insurance product marketplace is one that is constantly growing to provide new solutions to client needs. Paying attention to the details of the product is what sets an advisor apart in offering a tailored solution to the particular client’s goals.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

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