Indexed Universal Life Insurance

What indexed universal life is

Indexed universal life — IUL — is permanent life insurance with a cash value component whose growth is linked to the movement of a market index, usually the S&P 500, without the money being invested in the market. You are not buying stocks or a fund. You are buying a life insurance contract whose crediting method references an index.

Two features define the product, and both are contractual:

• A floor. If the index falls, the credited interest is typically zero for that period. Your cash value does not lose money to index performance — though policy charges still come out.
• A cap or participation rate. If the index rises sharply, your credit is limited. A 12% index year with a 9% cap credits 9%.

That floor-and-cap structure is the entire idea: you give up the upside above the cap in exchange for protection from the downside below zero.

What the illustration does not tell you

Every IUL proposal comes with an illustration showing cash value growing over decades. Those numbers are projections under assumed rates, not promises. The parts that are guaranteed are the death benefit and the policy charges. The crediting is not guaranteed, and the difference between an illustrated rate and an actual one compounds into a very different number over thirty years.

Two risks deserve plain language:

1. Underfunding. If premiums are set too low, policy charges can erode cash value until the policy lapses — often decades in, when coverage is hardest to replace.
2. Loans and withdrawals. Accessing cash value reduces the death benefit and can trigger a lapse if not managed. There may also be tax consequences.

Where IUL tends to fit

• You want coverage that never expires and you have a long time horizon
• You have already maxed tax-advantaged retirement accounts and want additional long-term capacity
• You want death benefit protection with some cash value accumulation and can commit to consistent funding
• You are insurable now and want to lock that in

It tends not to fit when the need is pure protection on a budget — a term policy delivers far more death benefit per dollar — or when the money might be needed in the next several years.

What to ask before signing

• What is the guaranteed minimum crediting rate, and what happens at zero?
• What are the policy charges, and how do they change as the policy ages?
• What premium keeps this policy in force to age 100 under the guaranteed column, not the illustrated one?
• What are the surrender charges and for how long?
• How is the index credit calculated — annual point-to-point, monthly sum, monthly average — and what is the cap today?

The answer to the third question is the one that separates a policy that survives from one that lapses. Ask for it in writing.

Frequently asked questions