Whole life insurance provides lifelong life insurance protection to your family and a cash value component you can access while you’re alive. Indexed whole life insurance Indexed whole life insurance earns credited interest based partly on the performance of a market index selected by the insurer, subject to policy rules such as caps, floors and participation rates.
Indexed whole life may appeal to shoppers who want permanent life insurance with tax-deferred cash value growth and less market exposure than some other permanent policy options. It lacks the higher investment risk of some permanent life insurance products but could still offer greater cash value growth potential than traditional whole life insurance. Here’s how to decide whether indexed whole life is right for you.
What is indexed whole life insurance?
Indexed whole life insurance has the same features of a traditional whole life insurance policy, but differs in the way the cash value earns interest. Your policy will provide:
A death benefit for your beneficiaries
Level premiums
Lifelong life insurance protection
Tax-advantaged cash value account
Cash value generally grows tax-deferred, and policyholders may be able to access it without income tax when the policy is structured and managed properly. Tax treatment can change if the policy becomes a modified endowment contract (MEC) or if ownership, beneficiary or payment arrangements create additional tax consequences.
Indexed Whole Life vs. Indexed Universal Life
Like whole life insurance, your insurance provider controls the interest rate of your indexed whole life insurance. However, in indexed whole life, your provider changes your interest rate based on the performance of a specific investment index (like the S&P 500).
Indexed whole life also differs from indexed universal life insurance (IUL). Depending on the policy, accumulated cash value and credited growth in an indexed whole life policy may be used to help offset future premiums or support a reduced paid-up policy. IUL generally offers more flexibility because policyholders can adjust premium payments and, in some cases, the death benefit within the policy’s limits.
→ Learn more about the different types of whole life insurance
How does indexed whole life insurance build cash value?
Indexed whole life insurance is a permanent life insurance policy with guaranteed features that typically include level premiums, a death benefit, a guaranteed interest rate on cash value and a stated policy endowment age. The policy’s nonguaranteed cash value growth can be linked to the performance of a market index, subject to policy terms such as caps, floors and participation rates.
Because indexed returns affect the nonguaranteed portion of the policy, cash value and death benefit growth may vary more than they would with a participating whole life policy that credits dividends. The policy’s underlying guarantees remain in place as long as the required premiums are paid.
Indexed whole life policies can be complex because guaranteed and nonguaranteed values work differently. Consider working with a financial professional to understand the policy’s guarantees, index-crediting method and how changes in nonguaranteed values could affect the policy over time.
How much does indexed whole life insurance cost?
Indexed whole life insurance rates vary based on several factors, including:
Your age when you buy your policy
Death benefit amount
Gender
Health and medical history
Lifestyle risks like smoking
Payment timeline for your policy
Cash value crediting method
Cap, floor and participation rate structure
Policy fees and administrative charges
Riders or added policy features
Payment period or premium schedule
Because indexed whole life policies vary by insurer and policy design, there is no single representative premium that applies broadly. Costs depend on factors such as the death benefit, premium schedule, policy fees and the way cash value growth is credited. An insurance professional can provide an illustration showing the guaranteed and nonguaranteed values for a specific policy.
Methodology: Monthly rates are calculated for non-smokers in a Preferred health classification, obtaining a whole life insurance policy payable within 99 years from MassMutual. Individual rates will vary as specific circumstances will affect each customer's rate. Rate illustration valid as of 01/01/2024.
Because of the high premiums, whole life insurance isn’t right for most people. Term life insurance is significantly more affordable. For example, a healthy 35-year-old male could pay $29.97 per month for a $500,000, 20-year term policy — the same amount of coverage than the sample whole life policy above at a fraction of the cost.
→ Learn more about the average cost of life insurance
If you want to use life insurance as an investment vehicle but are wary of policies with higher investment risk, an indexed whole life insurance policy may be worth considering. However, most people will get the most value from buying a term life policy and investing separately. Work with an independent insurance agent or financial advisor to get the best life insurance coverage for your family.
Indexed Whole Life Insurance and IUL Policy FAQs
Is indexed whole life insurance risky?
Indexed whole life insurance generally has less direct market risk than variable life insurance because the cash value is not directly invested in the market. That said, it still comes with risks, including high premium payments, policy fees, capped growth potential and possible tax consequences if cash value is accessed improperly.
Can you lose money in indexed whole life insurance?
Many indexed whole life policies include a guaranteed minimum interest crediting rate, which can help reduce downside risk when the index performs poorly. However, fees, policy loans, withdrawals and policy lapse can still reduce the value of the policy.
Is indexed whole life the same as indexed universal life?
No. Indexed whole life insurance typically has level premiums and a level death benefit, while indexed universal life insurance offers greater flexibility around premiums and death benefits. That flexibility can be useful, but it often requires more active policy management.
