*This information is for educational purposes only and shouldn't be considered personalized insurance advice. Consult a licensed insurance professional to determine the best coverage for your situation.
What Is Indexed Universal Life Insurance and How Does It Work?
Updated: July 24, 2025
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Key Takeaways
Indexed universal life insurance (IUL) combines permanent life insurance with a cash value component that grows based on stock market index performance, offering potential gains with protection from losses.
IUL works best for high-net-worth individuals who've maxed out other retirement accounts and want tax-free growth and access to funds, but it comes with high fees and complexity.
While IUL offers market-linked growth potential and tax advantages, financial advisors cite capped returns, high costs and better alternatives like 401(k)s for most people.
What Is Indexed Universal Life Insurance?
Indexed universal life insurance (IUL) is a permanent life insurance policy that provides a death benefit and a cash value component. The cash value is tied to a market index, allowing for potential growth.
IUL offers flexibility in premium payments and death benefits. The policy's cash value grows tax-deferred, and you can access it through loans or withdrawals. This lets you participate in market gains without directly investing in the stock market.
Cash value is the investment portion of your life insurance policy that accumulates over time. Unlike term life insurance, which only provides a death benefit, permanent life insurance policies like IUL build cash value you can borrow against or withdraw during your lifetime.
Note that this is insurance with investment features, not a direct investment product. While IUL includes investment-like features, it remains primarily an insurance product with associated insurance costs and regulations.
How Indexed Universal Life Insurance Works
Given its complexity, understanding how IUL works can seem overwhelming. Think of IUL as life insurance with a built-in investment account that responds to your financial needs. Your premiums pay for death benefit protection, and any extra money goes into an account that can grow based on the stock market's performance.
If the market goes up, your account grows. If it goes down, you don't lose money, but you don't gain anything either. You can adjust how much you pay and even borrow from the account while you're alive.
- S&P 500: Measures the performance of 500 large companies listed on U.S. stock exchanges
- NASDAQ-100: Includes 100 of the largest non-financial companies listed on the NASDAQ stock exchange
- Dow Jones Industrial Average (DJIA): Tracks 30 large, publicly owned companies trading on the NYSE and NASDAQ
- Russell 2000: Measures the performance of approximately 2,000 small-cap companies
- MSCI EAFE: Represents large and mid-cap securities across 21 developed markets, excluding the U.S. and Canada
- Paying less: Your cash value grows more slowly or might even shrink if you don't cover the policy's basic costs.
- Paying more: Extra money goes toward building cash value faster, which can increase your death benefit.
- Nonpayment: If you stop premium payments entirely without sufficient cash value to cover costs, the policy could lapse, causing loss of the cash value and death benefit.
Indexing and Interest Crediting
IUL links cash value growth to stock market indexes. When the S&P 500 rises, the cash value in the policy can rise too.
Insurance companies decide which indexes are available. Some give one option, others offer multiple choices. Match the selection to how much market volatility you can handle.
Popular indexes for IULs include:
The chosen index's performance determines how much interest gets added to your cash value. The structure usually has a cap and a floor, providing potential growth with some protection.
Premium Flexibility
With IUL, you control how much you pay each month. Having a tough financial year? Pay less. Got a bonus? Pay more. Traditional life insurance doesn't give you this wiggle room.
You can adjust payments as your life changes — new job, kids, retirement plans.
Here's how payment changes affect your policy:
Participation Rates, Caps and Floors
Your IUL's participation rate determines how much of the stock market's gains you actually receive. For example, if the market goes up 10% but your participation rate is 75%, you'll receive only 7.5% growth in your account.
Caps are the maximum amount your account can grow in a year, even if the market does better. If your cap is 12% and the market goes up 15%, you get only 12%.
Floors protect you from losing money. Even if the market crashes, your floor (usually 0%) means your account won't lose value but won't grow that year.
Cash Value Growth and Death Benefits
Your IUL cash value is like a savings account within your life insurance policy. This account grows based on stock market performance (with the abovementioned caps and floors). You can borrow money from this account or withdraw some of it while you're alive, though this might reduce your death benefit.
Death benefit is the money your family receives when you die — it's tax-free. Part of your monthly premium pays for this protection, while the rest goes into your cash value account.
Tax Implications
When your IUL policy matures (usually at the end of the policy term or when you reach a certain age), the benefits specified in the contract are paid out.
In an IUL policy, withdrawals from the cash value are tax-free up to the premiums you've paid. However, any withdrawals beyond this amount may be subject to income tax. Loans against your policy's cash value aren't taxable, but if the policy lapses or is surrendered with an outstanding loan, the loan amount may become taxable income.
If the policy is classified as a modified endowment contract (MEC), which occurs when premiums paid exceed federal tax limits, loans and withdrawals may be subject to taxation.
Pros and Cons of Indexed Universal Life Insurance
Pros
Growth potential: Your cash value can grow when the stock market does well, but you won't lose money when it tanks.
Flexibility: You can change how much you pay and adjust your death benefit as your life changes.
Tax advantages: Your money grows without yearly taxes, and you can access it tax-free in most cases.
Protection against market losses: IUL offers protection against negative market performance with features like floors.
Cons
Potential costs and fees: Hidden costs, administrative expenses and surrender charges can apply, affecting the policy's overall value.
Capped returns limit growth potential: IUL policies cap your returns (often at 10% to 12%), meaning you miss out on full market gains during strong years. These policies don't include dividends, which can represent a large portion of total market returns.
Better alternatives exist for most people: Many financial advisors argue that a 401(k) is better than IUL because it doesn't carry the high fees and premiums. The consensus is that IUL mainly suits high-net-worth individuals who have maxed out other retirement options.
Who Should and Shouldn't Consider IUL
IUL isn't right for everyone. Consider whether it aligns with your needs, goals and risk tolerance.
You'll Benefit From an IUL Policy if:
- 1
You're a high-net-worth individual
You've maxed out other retirement accounts like 401(k)s and IRAs and need additional tax-advantaged growth options.
- 2
You want market upside with downside protection
You're comfortable with capped returns in exchange for protection against market losses.
- 3
You're planning for estate transfer
You want to pass wealth to heirs through a tax-free death benefit.
- 4
You want tax-free growth and access
You value tax-deferred cash value growth and the ability to access funds tax-free through loans during your lifetime.
- 5
You can afford higher premiums
You have the financial capacity to fund the policy adequately and handle potential premium increases over time.
An IUL Policy Isn't Right for You if:
- 1
You're young and just starting out
You'd benefit more from maximizing employer 401(k) matching and investing in low-cost index funds.
- 2
You need guaranteed returns
You prefer predictable growth without market-related variability.
- 3
You want simple, affordable life insurance coverage
Term life insurance provides more death benefits for less money.
- 4
You're focused on maximizing returns
Direct stock market investing offers higher long-term growth potential without caps.
- 5
You need short-term access to funds
Early withdrawals from IUL policies often come with surrender charges and tax consequences.
How to Choose an IUL Policy
When comparing life insurance policies, understand the application and buying process. While requirements vary by insurer, these common steps apply when acquiring an indexed universal life insurance (IUL) policy.
- 1
Research each provider's reputation
Before selecting a company, check potential insurers' financial strength and customer service ratings. See our guide to the best universal life companies.
- 2
Consider different policy terms and investment options
Review each prospective policy's terms, including premium and death benefit flexibility. Inquire about available indexes for linking the cash value.
- 3
Work with a financial professional (optional)
For a more complex policy like indexed universal life, consulting with financial professionals can provide valuable insights and help you navigate IUL complexities.
- 4
Review your policy
Thoroughly read and understand your prospective policy, including fees, caps, floors and potential penalties for changes.
Which Companies Offer IUL?
Many major life insurance companies offer indexed universal life insurance policies. Leading providers include:
- Nationwide: Offers indexed universal life with various index options
- Pacific Life: Provides IUL policies with multiple crediting strategies
- Prudential: Features indexed universal life with flexible premium options
- Northwestern: Offers IUL with strong financial ratings and comprehensive support
- Transamerica: Offers IUL with competitive participation rates
- Lincoln Financial: Provides indexed universal life with various index choices
- Mutual of Omaha: Features IUL policies with flexible benefit options
- Allianz: Offers IUL policies with different accumulation strategies
- American General: Features indexed universal life with flexible benefits
Cost Analysis of Indexed Universal Life Insurance
IUL premiums vary based on age, health, coverage amount and your chosen policy features. Based on MoneyGeek's analysis of major insurers, monthly cost estimates for a $2 million IUL policy for healthy, nonsmoking persons range from:
By Age:
- 30: $1,200 to $2,000
- 40: $2,000 to $3,200
- 50: $3,200 to $4,800
- 60: $6,000 to $10,000
Factors That Affect Your Cost:
- Age: Premiums increase substantially with age.
- Health: Medical conditions dramatically increase costs.
- Coverage amount: Higher death benefits require higher premiums.
- Funding level: Max-funded policies require higher premium payments.
- Index options: Some crediting methods may have higher fees.
IUL policies are flexible, so you can adjust your premium payments based on your financial situation. Most financial advisors recommend funding IUL policies adequately to maximize cash value growth relative to insurance costs. For IUL to work effectively as an investment vehicle, many advisors suggest minimum annual contributions of $10,000 or more.
IUL vs. Other Universal Life Insurance Policies
To choose the right insurance strategy, understand the differences between an indexed universal life policy and other types of life insurance:
Indexed Universal Life Insurance vs. Universal Life Insurance
Key difference: How your cash value grows
- IUL: Your cash value growth is tied to a stock market index (like the S&P 500). You get market-linked returns with caps (maximum gains) and floors (minimum losses, usually 0%). This means potential for higher returns but more complexity.
- Universal life: Your cash value grows at the insurance company's fixed interest rate. You get steady, predictable growth without market risk, but lower return potential.
Variable Universal Life Insurance vs. Indexed Universal Life
Key difference: How much market risk you take
- Variable universal life (VUL): You invest your cash value directly in mutual fund-like accounts. You can earn higher returns but lose money if investments perform poorly. No downside protection.
- IUL: You get market-linked returns without direct market exposure. The floor (usually 0%) protects you from losses, but caps limit your maximum gains. More protection, less upside potential.
Alternatives to Indexed Universal Life Insurance
While IUL offers benefits, it isn't right for everyone. Here are other life insurance options:
- Whole life insurance offers guaranteed cash value growth and fixed premiums. It provides predictability and security but often at a higher cost.
- Term life insurance provides pure life insurance protection without cash value. It covers a specific term, such as 10, 20 or 30 years, and is generally more affordable than other options. It suits those seeking temporary protection without investment considerations.
- Investment accounts: Separate investment accounts, such as mutual funds or individual retirement accounts (IRAs), provide investment opportunities without linking them to life insurance. This approach allows for targeted investment strategies and diverse options without life insurance's combined benefits.
Types of IUL Strategies
Different IUL strategies offer various options with advantages and challenges:
A max-funded IUL strategy maximizes premium payments up to federal limits to optimize cash value growth without turning the policy into a modified endowment contract (MEC). This approach quickly builds cash value, creating a substantial financial asset accessible during the policyholder's lifetime.
Max-Funded IUL
Pros
- Maximizes tax-deferred growth of cash value
- Potential for higher long-term returns
- Increases potential death benefit
Cons
- Higher upfront premiums required
- Risk of becoming an MEC if overfunded
- Potentially less liquidity due to higher initial costs
A compound interest IUL account strategy leverages compound interest to increase the policy's cash value over time. This account is typically linked to a favorable interest crediting method (how the insurance company adds growth to your cash value). By reinvesting earned interest, the cash value grows exponentially over time, enhancing the policy's overall financial yield.
Compound Interest IUL
Pros
- Accelerates cash value growth through compound interest
- Can substantially increase the policy's value over time
- Provides long-term financial benefits for retirement
Cons
- Dependent on consistent market performance
- Longer time needed to realize substantial benefits
- Complexity in managing and understanding crediting rates
A fixed-indexed universal life insurance strategy provides a stable growth rate by linking cash value to a fixed index rather than more volatile equity markets. This conservative strategy offers predictable returns and less risk, which suits policyholders seeking stability over speculative gains.
Fixed-indexed Universal Life Insurance
Pros
- Provides stable and predictable growth
- Lower risk than other market-linked options
- Suits conservative investors
Cons
- Capped growth potential; may not capture full market upswings
- Not ideal for those seeking aggressive growth
- Potential for underperformance compared to other indexes
An equity-indexed universal life insurance strategy links cash value growth to equity market performance, offering higher returns but introducing more risk. Protective floors mitigate losses by setting a minimum interest crediting rate (typically 0%), but exposure to volatile equity markets means the policy's value can fluctuate substantially.
Equity-Indexed Universal Life Insurance
Pros
- Higher potential returns linked to stock market performance
- Floor guarantees protect against market downturns
- Offers a balance of growth potential and protection
Cons
- More exposure to market volatility
- Caps on returns can limit growth
- Requires more active management and understanding of market movements
How IUL Works: Bottom Line
Indexed universal life insurance (IUL) combines permanent life insurance with market-linked cash value growth, offering flexibility and tax advantages but with high fees and capped returns. It works best for high-net-worth individuals who've maxed out other retirement accounts and need additional tax-advantaged options for estate planning.
For most people, financial advisors recommend simpler alternatives like maximizing 401(k) contributions, investing in low-cost index funds or buying term life insurance for pure protection. Consider IUL only if you can afford higher premiums and truly need its benefits over straightforward investment options.
Indexed Universal Life Insurance: FAQ
Here are answers to frequently asked questions about IUL to help you understand this coverage and determine if it benefits you.
What is an IUL policy?
An indexed universal life (IUL) insurance policy is a permanent life insurance that combines a death benefit with a cash value component tied to a market index. The cash value is like a savings account within your policy that grows based on stock market performance (with caps and floors) while providing lifelong coverage.
Is IUL insurance a good investment?
IUL coverage is a good investment for those seeking potential growth with some protection against market losses. IUL offers growth opportunities while floors safeguard against negative returns. Other investment options can be better choices depending on your situation.
Is IUL good for retirement?
IUL can be part of a retirement savings strategy, offering potential growth and tax advantages. Cash value accumulation, premium flexibility and tax-free withdrawal potential make it suitable for long-term planning. However, consider it within your overall financial planning, aligning with your retirement goals and risk tolerance.
Is IUL insurance worth it?
IUL can be worth it for those who value flexibility in premiums and the potential for investment growth despite the fees and market risks.
How do I open an IUL account?
To open an IUL account, contact a licensed insurance provider, discuss your financial goals and obtain an IUL quote.
Where can I open an IUL account?
You can open an IUL account through any reputable insurance company that offers indexed universal life insurance, including Mutual of Omaha and Northwestern.
Is IUL tax-free?
IUL policies offer tax-deferred cash value growth and tax-free loans and withdrawals up to the amount paid in premiums. However, withdrawals exceeding premiums may be taxed as ordinary income. Withdrawals can also affect the policy performance and potentially reduce the guaranteed death benefit.
How do IUL loans work?
IUL loans let you borrow against your policy's cash value without paying taxes immediately as long as the policy stays active. If you don't repay loan interest, it grows and risks policy lapse. This could mean losing coverage and facing taxes on the loan amount.
When can you withdraw from an IUL?
Once your IUL has sufficient cash value, you can withdraw funds tax-free up to the total premiums paid. Excessive withdrawals can reduce the death benefit and might lead to policy lapse.
Can you lose money in an IUL?
IULs have protective floors to prevent losses, but poor index performance or high premiums and fees can still cause slower cash value growth or loss.
Do IUL premiums increase?
IUL premiums are flexible, allowing payment adjustments based on your finances. However, you must meet the minimum premium requirements to keep the policy active and maintain its benefits.
Can you have whole, term and IUL life insurance?
You can hold whole, term and IUL policies simultaneously. Each type serves different needs, from temporary coverage (term) to long-term investment and flexibility (IUL).
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About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.