Indexed Universal Life Insurance is also known as an IUL.

It is a type of permanent life insurance that combines a death benefit with the potential to build cash value linked to a stock market index—most often the S&P 500. An IUL gives you protection, tax-deferred growth, and flexibility you won’t find in term policies. Here’s a simple guide to help you understand how it works, what it costs, and who it may suit.

How Indexed Universal Life Insurance Works

1. Premium Allocation
   • Part of your premium pays for the death benefit.
   • The remainder goes into a cash value account.
2. Index-Linked Growth
   • Each year, your cash value earns interest based on a chosen index’s performance, up to a set cap rate (for example, 8%).
   • If the index falls, you still earn a guaranteed minimum interest rate (often 0%), so you don’t lose your principal.
3. Tax-Deferred Cash Value
   • Cash value grows without annual income taxes.
   • You can borrow or withdraw against it for retirement, emergencies, or other needs. Loans are generally tax-free if the policy stays in force.
4. Death Benefit
   • When you die, beneficiaries receive a tax-free death benefit.
   • You can choose a level death benefit or one that grows with the cash value.

Key Benefits of an IUL

• Downside Protection: You won’t lose cash value when the index dips, thanks to the floor rate.
• Upside Potential: You capture a portion of market gains up to your policy’s cap.
• Flexible Premiums: You can adjust payments within policy limits, speeding up or slowing down cash-value growth.
• Tax Advantages: Withdrawals or loans against cash value are generally tax-free.
• No Contribution Limits: Unlike 401(k)s or IRAs, you’re not capped by IRS contribution rules.
• Riders Available: Add long-term care, accelerated death benefit, or disability income riders for extra protection.

Potential Costs and Considerations of Index Universal Life Insurance

1. Caps and Participation Rates
   • The cap limits the maximum interest you earn.
   • Participation rate determines how much of the index gain counts toward your credit (e.g., 80% of a 10% gain).
2. Policy Fees
   • Monthly administrative fees and cost of insurance vary by insurer.
   • Higher fees reduce cash-value growth.
3. Loan Interest
   • Policy loans accrue interest. Unpaid loans reduce your death benefit and cash value.
4. Complexity
   • IULs are more complex than term or whole life. Read illustrations carefully and work with a knowledgeable advisor.

Who Should Consider an IUL?

• High-Income Earners: You’ve maxed out retirement accounts and want extra tax-deferred growth.
• Risk-Averse Investors: You want some market upside without direct stock-market risk to principal.
• Estate Planners: Use the tax-free death benefit to pass wealth to heirs or cover estate taxes.
• Business Owners: Fund buy-sell agreements or key-person coverage in one product.

How to Choose the Right IUL

Frequently Asked Questions

Q1: Is an IUL the same as a whole life policy?
A: No. While both build cash value, IULs link growth to an index and have flexible premiums, whereas whole life offers fixed growth and premiums.

Q2: What index do IULs use?
A: Most use the S&P 500 or a mix of major U.S. indexes. Your insurer will list options in the policy.

Q3: Can my policy lapse if cash value drops?
A: Yes—if you don’t pay enough premium and fees exceed cash value, the policy can lapse. Always monitor your account.

Q4: How quickly does cash value grow?
A: Growth depends on index performance, your cap and participation rates, and policy fees. Ask for historical illustrations.

Q5: Are policy loans taxable?
A: Generally no, if the policy remains in force and is not classified as a Modified Endowment Contract (MEC).

Q6: Up to what age can I buy an IUL?
A: Most insurers issue IULs up to age 75, but exact limits vary by company.

Learn more about Indexed Universal Life Insurance (IUL) and see if it fits your plan by reaching out to an agent