How does an equity index universal life policy differ from a standard universal life policy?

An equity index universal life policy differentiates itself from a standard universal life policy primarily through the way it credits interest to the cash value component. Specifically, the equity indexed policy ties its interest rates to the performance of a stock market index, such as the S&P 500. This means that the policyholder's cash value can potentially grow at a faster rate than a standard universal life policy, which typically offers a fixed interest rate.

The growth in cash value for the equity indexed policy is subject to certain caps and floors, meaning there is a limit on the maximum interest that can be credited in a strong market, as well as a guarantee that the policy will not lose value in a down market. This mechanism allows policyholders to participate in market gains without directly investing in the stock market, making it an attractive option for those looking to enhance their cash value growth while maintaining some level of protection.

In contrast, a standard universal life policy usually offers a more stable but potentially lower interest rate, which is not linked to market performance. This makes the equity indexed option particularly appealing to those who are risk-averse yet desire opportunities for greater growth linked to equity market performance.