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What is Indexed Life Insurance?

By Ken Black
Updated May 17, 2024
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Indexed life insurance is a policy that is dependent on outside factors to determine the value and price of the policy. This category includes two different types of policies. One type includes policies where the premiums and benefits are based on the consumer price index (CPI). The other type, called Equity indexed life insurance refers to investments that are made with excess premiums paid into a policy.

The most easily understood type of indexed life insurance is that, which uses the CPI. Both the premium and benefit are tied to the inflation rate. For example, if a policy was originally bought with a benefit of $100,000 US Dollars for a $100 monthly premium, and the CPI went up 5%, the next year the premium would be $105, and the benefit amount would be $105,000.

An indexed life insurance policy is helpful for those who want to make sure the relative value of the benefit and premium never change. Often, these policies are whole life insurance policies, meaning they are good for as long as insured individual is alive, and will be paid upon that individual's death. This is in contrast to term life insurance, that only pays benefits if the individual dies within a certain time frame.

Equity indexed life insurance is a product that can be little more complicated to understand, simply because it is both an insurance policy and an investment vehicle. A portion of the premium will go to administer the policy as usual, but the majority of the premium will be invested in some type of fund or index. If the fund grows in value, the insurance policyholder will receive a payment based on a certain percentage of the growth, up to a certain amount.

As with many types of cash value life insurance policies, equity indexed life insurance offers the consumer options as far as withdrawal and borrowing against the value. Thus, it is a life insurance vehicle that can become a funding option while the insured person is still alive. The withdrawal and borrowing may come with certain fees and penalties, however. It is up to the investor to understand these terms and conditions before making any decisions.

Those looking at indexed life insurance products will likely need to qualify based on a number of criteria. Age, health, and family medical history are often factors with any life insurance policy, and these are no exceptions. Death benefits will eventually be paid on these policies, and the insurance companies want to be certain they are making a sound investment.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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