Indexed universal life (IUL)
Life insurance that can do more than pay a death benefit
Indexed universal life combines permanent life insurance protection with cash-value accumulation tied to an external index — subject to caps, participation rates, charges and other limits.
Watch: a quick look at how an IUL works
What it is
Permanent life insurance with index-linked cash value
Indexed universal life is a type of permanent life insurance. Part of each premium pays for the insurance and policy expenses; the rest goes to the policy’s cash value.
The cash value can earn interest based partly on the performance of an external market index, such as the S&P 500®. You are not buying shares or investing in the index — the insurance company uses a formula with a cap, a participation rate and a floor to decide how much interest to credit.
Potential uses
How people use IUL
Every use depends on proper design, consistent funding and the policy’s terms.
Life insurance protection
A death benefit for your beneficiaries that can last a lifetime if the policy stays in force.
Cash-value accumulation
Interest credits linked to an index, with a floor that limits negative crediting.
Supplemental retirement strategy
Some people use policy loans or withdrawals as one part of a broader retirement plan.
Legacy planning
A death benefit that is generally income-tax-free to beneficiaries under current law.
Living benefits
Many IULs offer riders that may accelerate part of the benefit for qualifying illnesses.
Children’s long-term planning
Parents sometimes start a policy early to build long-term cash value.
Who it may fit
IUL may be worth exploring if…
IUL is not the right fit for everyone. It generally works best for people with a long time horizon who can fund the policy consistently.
- You want permanent coverageAnd you’re interested in cash-value growth potential.
- You can fund it consistentlyUnderfunded policies may perform poorly or lapse.
- You have a long time horizonEarly years carry higher charges relative to cash value.
- You’ve covered the basicsEmergency savings and adequate protection come first.
- You want flexibilityPremiums and death benefit can be adjusted within limits.
Design matters
Two IULs with the same premium can perform very differently
How the death benefit, premium and riders are structured changes how much of each dollar goes to insurance costs versus cash value. We walk you through the design and the illustration line by line — including the non-guaranteed assumptions.
- Death benefit optionLevel vs. increasing death benefit changes costs over time.
- Funding levelMinimum vs. target vs. maximum funding under tax rules.
- Crediting strategyWhich index accounts and caps you allocate to.
- RidersLiving benefits, overloan protection and others vary by carrier.
FAQ
Common questions
Is an IUL an investment?
No. IUL is life insurance. The cash value is not invested in the stock market; interest is credited based on an index formula set by the insurance company.
Can an IUL lose money?
The floor (often 0%) prevents negative index crediting, but monthly policy charges and cost of insurance are still deducted. In years with low or zero credits, cash value can go down. Loans, withdrawals and underfunding can also reduce values or cause a lapse.
How is interest credited?
At the end of each crediting period, the insurer looks at the index change, applies the participation rate, then limits the result by the cap and floor. Methods vary by contract.
Can I access my cash value?
Usually through policy loans or withdrawals. Both reduce cash value and death benefit, loans accrue interest, and either may have tax consequences or cause the policy to lapse if not managed.
Is IUL income tax-free?
Death benefits are generally income-tax-free to beneficiaries, and loans may be taken without current income tax if the policy is structured and maintained properly and is not a modified endowment contract. Tax results depend on your situation — consult a tax professional.