Indexed Universal Life (IUL)
What to Know Before You Buy One
Indexed universal life, or IUL, is a big passion of mine. If it’s funded properly, it can provide lifelong coverage and cash value under the contract’s terms. If it isn’t, it can run out of money. You should know the difference before you buy one, which is why I start by educating you on how it works.
What an IUL Is
An IUL is permanent life insurance with a cash value. Part of what you pay covers the insurance and the policy’s charges. The rest goes into the cash value, where it can earn interest.
That interest is based partly on a market index, such as the S&P 500, up to limits set by the policy. Your money isn’t invested in the index. In a year when the index falls, no interest may be credited, but the index drop itself doesn’t subtract from your cash value.
What Decides Whether One Works
- The charges. The cost of insurance and other charges come out every year, and they usually rise as you get older. They come out even in a year when no interest is credited.
- The limits. Caps and participation rates set how much of the index’s gain you receive, and the insurance company can change them within the contract’s terms.
- The funding. A policy that’s paid in too lightly can run short. If the cash value can’t cover the charges, the policy can lapse, which can mean losing the coverage and owing taxes.
- The time. Surrender charges apply in the early years, and an IUL generally takes many years to make sense.
A Word About Illustrations
Before you buy an IUL, you’ll see an illustration showing what it might do over time. An illustration is an estimate built on assumptions, and it isn’t a promise. Ask to see the guaranteed column next to the assumed one.
Loans and Taxes
You can generally borrow against your cash value, and a policy loan generally isn’t taxed while the policy stays in force. A loan also charges interest and reduces what your family receives, and a lapse with a loan outstanding can create a tax bill. Paying in too much too fast can make the policy a modified endowment contract, and then loans can be taxed. Your tax professional should weigh in on your own situation.
An IUL is a life insurance policy, not an investment in the market or a savings account. Guarantees depend on the financial strength and claims‑paying ability of the issuing insurance company. This page is general information, not tax advice.
Frequently Asked Questions
What is an IUL?
IUL is short for Indexed Universal Life. It's permanent life insurance with a cash value. The insurance company credits interest to that cash value based partly on a market index, such as the S&P 500, up to limits set by the policy. Your money isn't invested in the index. The policy's charges come out every year, whether or not any interest is credited, so a policy that isn't funded properly can shrink or lapse.
Learn how an IUL works →Can you lose money in an IUL?
Yes. A falling index doesn't subtract from your cash value directly, but the policy's charges keep coming out, including in a year when no interest is credited. Those charges usually rise as you get older. If the cash value can't cover them, the policy can lapse, which can mean losing the coverage and owing taxes. Surrender charges also apply in the early years. An illustration shows what might happen, and it isn't a promise.
Learn how an IUL works →Can I buy an IUL on my child or grandchild?
Often, yes. A parent or grandparent can usually buy permanent life insurance on a child, and insuring someone young generally costs less. Who can own the policy and who has to consent varies by state and insurer. It only works if the policy keeps getting funded for many years, so be honest about whether that's realistic for you. It's life insurance, not a savings account. I'll show you what's guaranteed in the contract and what isn't, so you can decide whether it makes sense for your family.
Learn how an IUL works →