When it comes to permanent life insurance, two popular choices are Indexed Life Insurance (ILI) and Variable Life Insurance (VLI). Both types of insurance provide lifelong coverage and the opportunity to grow your cash value over time, but the way they handle growth and risk differs significantly.
In this blog, we’ll dive into Indexed Life Insurance vs. Variable Life Insurance and help you determine which one suits your financial goals, risk tolerance, and personal preferences.
What Is Indexed Life Insurance
Indexed life insurance is a kind of permanent life insurance in which the success of a stock market index, such as the S&P 500, determines how much your cash value will increase.This allows you to potentially benefit from market growth without directly investing in stocks or mutual funds. The cash value of your policy grows based on the performance of this index, but with a floor to protect you in case of market downturns.
Key Features of Indexed Life Insurance:
- Market Linkage: The cash value grows according to the performance of a market index, but it’s not directly tied to individual stocks.
- Caps and Floors: There’s typically a cap on the maximum return you can earn, but also a floor that protects you from losing money, even if the market performs poorly.
- Steady Growth: The growth potential is usually more predictable than variable life insurance because your cash value won’t decrease even if the market falls below a certain point.
- Flexible Premiums: Like other permanent life policies, Indexed Life Insurance allows for flexible premiums and death benefits.
What Is Variable Life Insurance?
Another form of permanent life insurance is variable life insurance, which differs significantly in that your cash value is invested in a range of securities, including stocks, bonds, and mutual funds, allowing you greater discretion over your investing decisions. Unlike Indexed Life Insurance, Variable Life Insurance does not have a cap or a floor, meaning that the growth or loss of your cash value is entirely dependent on the market’s performance.
Key Features of Variable Life Insurance:
- Investment Flexibility: You can choose from a wide range of investment options, including stocks, bonds, and mutual funds. You have control over your cash value’s growth, but this comes with more risk.
- No Caps or Floors: Your cash value can grow without limitations, but it is also subject to market fluctuations. If the market performs poorly, your policy’s cash value can decrease.
- Higher Growth Potential: Since your investments can potentially perform well in a rising market, your cash value has the potential for higher returns than Indexed Life Insurance.
- Flexible Death Benefit and Premiums: Like Indexed Life Insurance, VLI offers the ability to adjust premiums and the death benefit.
Key Differences Between Indexed and Variable Life Insurance
1. Growth Potential and Risk
Indexed Life Insurance (ILI):
- The cash value grows based on the performance of a market index, but with a cap on maximum growth. If the index performs well, your cash value can increase, but you’ll only earn up to a certain percentage.
- Your cash worth won’t drop if the market performs poorly because there is floor protection. This provides a safe growth environment, with moderate returns over time.
- Moderate Risk: The risk is low because you won’t lose money in a bad market, but you may also miss out on higher returns in a strong market.
Variable Life Insurance (VLI):
- The cash value is directly tied to your chosen investments, which can lead to higher growth potential but also expose you to market volatility.
- No Caps or Floors: There are no restrictions on how much your cash value can grow, but there is also no safety net in case of market downturns. Your cash value could grow rapidly in a good market or decrease in a poor one.
- High Risk, High Reward: VLI offers the potential for higher returns, but it comes with higher risk. If you’re comfortable with market fluctuations, this option may be suitable for you.
2. Control Over Investments
Indexed Life Insurance (ILI):
- Less Control: With ILI, you’re not choosing specific investments. Instead, you cannot choose stocks or bonds directly; instead, the cash value is linked to an index, such as the S&P 500. The main decision is how to allocate your cash value across different index-linked options.
- Simpler: Because ILI doesn’t require active management of investments, it’s a simpler and less involved policy to maintain.
Variable Life Insurance (VLI):
- More Control: VLI offers more control over your investments. A range of stocks, bonds, mutual funds, and other options is available for you to choose from. This gives you more freedom to align your investments with your financial goals.
- Active Management: Because you have the power to manage your investments, you’ll need to actively monitor your portfolio and make adjustments as needed. This is better suited for those who want to play an active role in their policy’s growth.
3. Fees and Costs
Indexed Life Insurance (ILI):
- Lower Fees: Generally, Indexed Life Insurance comes with lower fees compared to Variable Life Insurance. Since it’s not tied to actively managed investments, the administrative costs are often more affordable.
- Simplicity Equals Lower Costs: With fewer options to choose from and no need for constant investment adjustments, ILI policies are usually simpler and cheaper to maintain.
Variable Life Insurance (VLI):
- Higher Fees: Due to the wide range of investment options and active management involved, VLI typically carries higher fees than Indexed Life Insurance. You may pay for fund management, investment advisors, and administrative costs, which can add up over time.
- Investment Costs: Each investment option may have its own fees, including expense ratios for mutual funds, which can reduce the overall return of your investments.
4. Flexibility and Customization
Indexed Life Insurance (ILI):
- Flexible Premiums: Like other permanent policies, ILI allows you to adjust premiums and death benefits over time.
- Less Customization: However, there’s less flexibility in choosing how your cash value grows since it’s tied to a stock market index.
Variable Life Insurance (VLI):
- High Flexibility: VLI offers greater flexibility in terms of both premium payments and investment options. You can adjust your premiums and death benefits, and you can choose where to invest your cash value based on your goals and risk tolerance.
- Active Customization: With the ability to select individual investments and manage your portfolio, VLI is more customizable, but it requires more effort on your part.
Which One Should You Choose?
Consider Indexed Life Insurance (ILI) if:
- You want moderate growth with protection from market downturns.
- You prefer lower fees and a simpler, more hands-off approach to managing your policy.
- You’re looking for predictable growth without the risk of market losses.
Consider Variable Life Insurance (VLI) if:
- You want higher growth potential and are comfortable with the risks of market fluctuations.
- You want more control over your investment strategy and are willing to actively manage your policy.
- You’re seeking a long-term investment tool that offers greater customization.
Final Thoughts
Both Indexed Life Insurance and Variable Life Insurance offer permanent coverage, but they are designed for different types of buyers. Indexed Life Insurance provides more stability and moderate growth, while Variable Life Insurance offers greater potential for returns but with more risk and complexity.
At Oros Life Insurance, we help guide you through the decision-making process to find the policy that best suits your goals and risk tolerance. Whether you’re seeking predictability with Indexed Life Insurance or greater control and growth potential with Variable Life Insurance, we are here to assist you.
Need Help Choosing the Right Life Insurance?
Contact Oros Life Insurance today to schedule a consultation with one of our experts. We’ll help you choose the best plan to meet your financial needs and long-term goals.
