Why do equity-indexed life insurance policies have an increased premium?

Equity-indexed life insurance policies typically feature higher premiums because they offer a greater amount of protection than standard whole life or term insurance policies. This type of policy combines a death benefit with a cash value component that can be linked to a stock market index, such as the S&P 500. The potential for cash value growth tied to market performance provides policyholders with the chance for greater returns compared to traditional whole life policies, but this also requires more capital to support the benefits offered.

The premium increase reflects the additional risk and complexity involved in offering these enhanced features and benefits, including the opportunity for policyholders to participate in market gains without directly investing in the stock market. Consequently, the premium not only funds the death benefit but also supports the cash accumulation aspect, which is designed to perform in line with equity market movements while mitigating the risk for the insurer.

In contrast, while administrative costs, management fees, and market risks do play roles in overall policy pricing, they do not directly explain the necessity for a premium increase specific to the heightened level of coverage provided by equity-indexed policies. The focus remains on the enhanced protection and investment component that justifies the higher premium.