Indexed Universal Life Insurance (IUL) Meaning and Pros and Cons (2024)

What Is Indexed Universal Life Insurance (IUL)?

Indexed universal life (IUL) insurance policies can help you to build wealth while leaving behind a death benefit for your loved ones. These policies put a portion of the policyholder’s premium payments toward annual renewable term life insurance, with the remainder added to the cash value of the policy after fees are deducted. On a monthly or annual basis, the cash value is credited with interest based on increases in an equity index.

While IUL insurance may prove valuable to some, it’s important to understand how it works before purchasing a policy. There are several pros and cons in comparison to other forms of life insurance.

Key Takeaways

  • Indexed universal life (IUL) insurance policies provide greater upside potential, flexibility, and tax-free gains.
  • This type of life insurance offers permanent coverage as long as premiums are paid.
  • Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns.
  • An IUL policy may be canceled if you stop paying premiums.
  • In general, these policies are best for those with a large up-front investment who are seeking options for a tax-free retirement.


Click Play to Learn the Pros and Cons of Indexed Universal Life Insurance

Understanding Indexed Universal Life Insurance

IUL insurance is often pitched as a cash value insurance policy that benefits from the market’s gains tax-free—without the risk of loss during a market downturn.

When you purchase an IUL insurance policy, you’re getting permanent coverage as long as premiums are paid. Your policy includes a death benefit, which is paid out to your named beneficiary or beneficiaries when you pass away. But the policy can also increase in value during your lifetime through a cash value component.

The cash value portion of your policy earns interest based on the performance of an underlying stock market index. For example, returns may be linked to Standard & Poor’s (S&P) 500 composite price index, which tracks the movements of the 500 largest U.S. companies by market capitalization. As the index moves up or down, so does the rate of return on the cash value component of your policy.

The insurance company that issues the policy may offer a minimum guaranteed rate of return. There may also be an upper limit or rate cap on returns.

IUL insurance is riskier than fixed universal life insurance policies, which offer a guaranteed rate of return. But it’s less risky than variable universal life insurance, which allows you to invest money directly in mutual funds or other securities.


You may be able to borrow against the cash value accrued in an indexed universal life insurance policy, but any loans outstanding when you pass away would be deducted from the death benefit.

Indexed Universal Life Insurance (IUL) Meaning and Pros and Cons (1)

Benefits of Indexed Universal Life Insurance

As is the case with any type of universal life insurance, it’s vital to thoroughly research any potential firms to ensure that they’re among the best universal life insurance companies currently operating. With that in mind, here’s a look at some of the chief advantages of including IUL in your financial plan.

1. Higher Return Potential

These policies leverage call options to gain upside exposure to equity indexes without the risk of losses, while whole life insurance policies and fixed universal life insurance policies provide only a small interest rate that may not even be guaranteed. Of course, the annual return that you see with an IUL insurance policy will depend on how well its underlying index performs. But your insurance company can still offer a guaranteed minimum return on your investment.

2. Greater Flexibility

IUL insurance can offer flexibility when putting together a policy that’s designed to meet your investment goals. Policyholders can decide how much risk they would like to take in the market, adjust death benefit amounts as needed, and choose among a number of riders that make the policy customizable to their needs. For example, you may choose to add on a long-term care rider to cover nursing home costs if that becomes necessary or an accelerated death benefit rider, which can pay out benefits if you become terminally ill.

3. Tax-Free Capital Gains

Capital gains tax applies when you sell an asset or investment for a profit. Indexed universal life insurance policyholders do not pay capital gains on the increase in cash value over time unless they abandon the policy before it matures, whereas other types of financial accounts may tax capital gains upon withdrawal.

This benefit extends to any loans that you may take from the policy against your cash value. Having a ready source of cash that you can borrow against may be appealing if you want to avoid triggering taxes and penalties with an early withdrawal from a 401(k) or IRA.


Unlike a 401(k) or traditional IRA, there are no required minimum distributions for cash value accumulation in an indexed universal life insurance policy.

4. No Social Security Impact

Social Security benefits may be an important source of income in retirement. You can begin taking Social Security as early as age 62 or defer benefits up to age 70. Taking benefits ahead of your full retirement age can shrink your benefit amount, as can working while receiving benefits. You’re only allowed to earn so much per year prior to reaching full retirement age before your benefits are reduced.

Cash value accumulation from an IUL insurance policy wouldn’t count toward the earnings thresholds, nor would any loan amounts that you borrow. So you could take a loan against your policy to supplement Social Security benefits without detracting from your benefit amount.

5. Death Benefit

IUL insurance, like other types of life insurance, can provide a death benefit for your loved ones. This money can be used to pay funeral and burial expenses, cover outstanding debts such as a mortgage or co-signed student loans, fund college costs for children, or simply pay for everyday living expenses. This death benefit can be passed on to your beneficiaries tax-free.


Financial experts often advise having life insurance coverage that’s equivalent to 10 to 15 times your annual income.

Drawbacks of Indexed Universal Life Insurance

There are several drawbacks associated with IUL insurance policies that critics are quick to point out. For instance, someone who establishes the policy over a time when the market is performing poorly could end up with high premium payments that don’t contribute at all to the cash value. The policy could then potentially lapse if the premium payments aren’t made on time later in life, which could negate the point of life insurance altogether.

Aside from that, keep in mind the following other considerations:

1. Caps on Returns

Insurance companies often set maximum participation rates of less than 100% and as low as 25% in some cases. In addition, returns on equity indexes are often capped at certain amounts during good years. These restrictions can limit the actual rate of return that’s credited toward your account each year, regardless of how well the policy’s underlying index performs.

In that case, you may be better off investing in the market directly or considering a variable universal life insurance policy instead. But it’s important to consider your personal risk tolerance and investment goals to ensure that either one aligns with your overall strategy.

2. No Guarantees

Whole life insurance policies often include a guaranteed interest rate with predictable premium amounts throughout the life of the policy. IUL policies, on the other hand, offer returns based on an index and have variable premiums over time. This means that you have to be comfortable riding out fluctuations in returns while also budgeting for potentially higher premiums.

3. Fees

IUL insurance policies can come with a slew of fees and other costs, including:

  • Premium expense charges
  • Administrative expenses
  • Riders
  • Fees and commissions
  • Surrender charge

All of these fees and various costs can detract from the rate of return offered by your policy. That’s why it’s important to research the best life insurance companies so you understand what you’re paying for in coverage and getting in return.

Indexed Universal Life Insurance Pros and Cons


  • Provide higher returns than other life insurance policies.

  • Policies can be designed around your risk appetite.

  • Allows tax-free capital gains.

  • IUL does not reduce social security benefits.


  • Returns are capped at a certain level.

  • No guaranteed returns.

  • IUL may have higher fees than other policies.

Indexed Universal Life Insurance vs. Other Life Insurance Policies

Unlike other types of life insurance, the value of an IUL policy is tied to an index tied to the stock market. This means that the returns may vary, depending on the performance of the underlying index.

There are many other types of life insurance policies, explained below.

  • Term life insurance offers a fixed benefit if the policyholder dies within a set period of time, usually between 10 and 30 years. This is one of the most affordable types of life insurance, as well as the simplest, though there's no cash value accumulation.
  • Whole life insurance is more permanent, and the policy lasts for the entire life of the policyholder as long as premiums are paid. The policy gains value according to a fixed schedule, and there are fewer fees than an IUL policy. However, they do not come with the flexibility of adjusting premiums.
  • Variable life insurance comes with even more flexibility than IUL insurance, meaning that it is also more complicated. A variable policy's cash value may depend on the performance of specific stocks or other securities, and your premium can also change. For this reason, variable life insurance is considered riskier than other life insurance policies.

Is Indexed Universal Life Insurance (IUL) a Good Investment?

While an indexed universal life insurance policy can provide a good way to provide for your loved ones, it's typically not an appropriate investment strategy for most people. High premiums and additional fees mean that an indexed policy may be hard to maintain over the long term, and you may lose the money already spent if your policy lapses. While this may be suitable for some people, others may be better off with stocks or bonds.

How Does an Indexed Universal Life Insurance (IUL) Policy Work?

An indexed universal life insurance policy includes a death benefit, as well as a component that is tied to a stock market index. The cash value of the policy rises or falls, depending on the performance of that index. These policies offer higher potential returns than other forms of life insurance, as well as higher risks and additional fees.

Is Indexed Universal Life Insurance Better Than a 401(k) Plan?

Indexed universal life insurance and 401(k) plans all have their own advantages. A 401(k) has more investment options to choose from and may come with an employer match. However, an IUL comes with a death benefit and an additional cash value that the policyholder can borrow against. However, they also come with high premiums and fees, and unlike a 401(k), they can be canceled if the insured stops paying into them.

The Bottom Line

IUL insurance can help you meet your family’s needs for financial protection while also building cash value. However, these policies can be more complex compared to other types of life insurance, and they aren’t necessarily right for every investor. Talking to an experienced life insurance agent or broker can help you decide if indexed universal life insurance is a good fit for you.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a financial professional to determine a suitable retirement savings, tax, and investment strategy.

Indexed Universal Life Insurance (IUL) Meaning and Pros and Cons (2024)


Indexed Universal Life Insurance (IUL) Meaning and Pros and Cons? ›

Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns. An IUL policy may be canceled if you stop paying premiums. In general, these policies are best for those with a large up-front investment who are seeking options for a tax-free retirement.

What is the downside of an IUL? ›

Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns. An IUL policy may be canceled if you stop paying premiums. In general, these policies are best for those with a large up-front investment who are seeking options for a tax-free retirement.

Is the IUL good or bad? ›

An IUL is a very bad option for retirement planning. As with any investment tied to an index fund, your returns will be mediocre at best. About the most you can expect the cash value to do is beat inflation over time—and even that's iffy.

How does money grow in an IUL? ›

IUL policies allow you to grow your cash value by putting a portion toward an equity index account like the S&P 500 or NASDAQ. Rather than only relying on non-equity earned rates, an equity index account grows based on the index of an entire market or market sector.

Can you take money out of IUL? ›

While you can access your cash value in an IUL policy, there are certain cases when taking out the money will be taxable. For instance, you can withdraw up to your basis (the amount you've paid into the policy) tax-free.

Do you have to pay back money from IUL? ›

After enough cash has accumulated, a policyholder can borrow from their IUL, although they can expect to pay interest on the loan. If they don't pay it back in full, the amount owed will be deducted from their death benefit.

Is an IUL better than a 401k? ›

Unlike with traditional 401(k)s, The IUL is funded with non-qualified money, or after-tax dollars. So what you pay into IUL has been taxed already. That's good news for future income – tax-free retirement income! IUL also offers the advantage of a tax-efficient death benefit for loved ones.

How much money can I put in a IUL? ›

The guide by IAMS provides an example of how the annual premium limit works. For a policyholder who is 35 years old and in good health, the annual premium limit might be around $40,000. This means that the policyholder can contribute up to $40,000 to their IUL policy each year.

How much does a million dollar IUL cost? ›

The cost of a $1 million life insurance policy for a 10-year term is $32.05 per month on average. If you prefer a 20-year plan, you'll pay an average monthly premium of $46.65.

How much can you put into a IUL account? ›

There is no contribution limit on an IUL policy, unlike an IRA or 401(k). You can put as much as you'd like into the contract and the amount will grow.

Can I put my 401k into an IUL? ›

Technically, you can't roll over your 401(k) account into an insurance policy; however, if you have a life insurance needs, you can withdraw funds from the account and redirect them to pay for a life insurance policy.

How does an IUL account work? ›

Indexed universal life insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. The money in your cash value account can earn interest based on a stock market index chosen by your insurer, such as the S&P 500 or the Nasdaq Composite.

Does an IUL have living benefits? ›

A unique feature of IUL is that it includes living benefits. Living benefits are for chronic illness, critical illness, and terminal illness. That means it will pay you tax-free cash benefits as the policyholder even before you die. Chronic illness is coverage you can compare to long-term care insurance.

How soon can I borrow from my life insurance policy? ›

How Soon Can You Borrow Against a Life Insurance Policy? You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. Depending on how your policy is structured, this can take several years to accrue.

Is an IUL better than a Roth IRA? ›

IULs have fixed premium costs, have an investing elemen and pay a tax-free lump sum to your beneficiaries. On the other hand, Roth IRAs have unlimited growth (and loss) potential and require no commitment for a specific contribution size or frequency. They also provide tax-free income in retirement.

How much can I borrow from my life insurance policy? ›

Loan limits: The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. If you need more than that amount, you may need to consider other loan types.

How long does an IUL last? ›

Indexed universal life insurance (IUL) offers lifelong coverage and may have some flexibility with the death benefit and premiums. You may be able to adjust your death benefit and payments within certain limits if your needs or budget change.

What is better than an IUL? ›

Whole life is generally the safest route for those looking for something predictable and reliable, while IUL policies provide an interesting retirement-planning vehicle with greater upside potential and tax advantages.

How does an IUL work? ›

Indexed universal life (IUL) insurance is a form of permanent life insurance that offers a cash value component along with a death benefit. The money in the cash value account can earn interest through tracking an equity index selected by the insurer, and can also usually be partially allocated to a fixed-rate account.

Can you open an IUL for a child? ›

There are several companies that offer Indexed Universal Life Insurance policies for children. This type of policy provides a death benefit and tax-free cash that your child can use when they are older. It's a great way to transfer wealth or to help your kids get a head start with their finances.

What is the 7 pay rule for IUL? ›

The 7-pay premium limit is a level annual amount of money that can be put into a cash value life insurance policy during each of the first seven policy years (or the first seven years after a material change in the policy, e.g. an increase in the face amount).

What is the average IUL commission? ›

Street level IUL commissions are usually in the range of 75%-90% depending on the company. You can expect to receive this commission level from nearly any IUL FMO or BGA. Some carriers offer bonus amounts above street level up to 20% once you hit a certain production milestone.

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