Indexed Universal Life (IUL): Why Policy Reviews Matter More Than Ever
Indexed Universal Life (IUL) insurance is often marketed as a tax-advantaged way to grow wealth while providing lifelong protection. But beneath the surface lies a complex structure that requires active management and full transparency. Whether you’re a current policyholder or exploring your options, this blog breaks down the history, components, risks, and controversies surrounding IULs—along with a clear call to action.
A Brief History: When Were IULs Created?
The first IUL policy was introduced in 1997 by Transamerica to bridge the gap between flexible universal life insurance and the performance potential of market-linked investing (Investopedia).
Although many people associate IULs with the post-2008 era, they gained mass popularity after the 2008 financial crisis, when consumers became disillusioned with market volatility and sought new ways to protect and grow their money.
Why Did IULs Gain Popularity After 2009?
Downside Protection: IULs offered market-linked gains with a 0% floor during negative years, which attracted those burned by the 2008 crash.
Low Interest Rates: With savings accounts and bonds earning little, IULs looked like an appealing growth alternative.
Aggressive Promotion: Financial professionals began marketing IULs as tax-free retirement strategies or “alternative 401(k)s”—sometimes without disclosing the full risks (Forbes).
Core Components of an IUL Policy
1. Flexible Premiums
IULs offer premium flexibility: you can increase, decrease, or even skip payments as long as there’s enough cash value to cover internal costs (NAIC).
2. Cash Value Growth Linked to a Market Index
Instead of earning fixed interest, the cash value grows based on the performance of an index (like the S&P 500)—but your money is not directly invested in the stock market (FINRA).
3. Caps, Floors, and Participation Rates
Cap: The maximum credited interest (e.g., 6.5%–8.5% conservatively)
Floor: Usually 0%—protecting against market losses
Participation rate: You may only get a percentage of the index gain (e.g., 80%–100%)
Example: If the index grows by 10%, and your cap is 7% with an 80% participation rate, your credited interest may only be 6%.
These are set by the insurance company and may change annually.
4. Annual Renewable Term Insurance Structure
One of the most misunderstood aspects of IUL is that it's built on an Annual Renewable Term (ART) chassis. That means each year, the cost of providing the death benefit increases as you age—regardless of your original premium. The Cost of Insurance (COI) rises annually, which can put pressure on the cash value if the policy isn’t adequately funded or performing well (Investopedia).
Key Risks You Should Understand
Underperformance
Illustrations often show ideal scenarios that may not play out in real-time. If actual returns fall short, your policy could under-deliver or even lapse.
Rising Costs of Insurance
Because IULs are built on annual renewable term, the COI increases each year. If your cash value doesn’t grow fast enough, it can be eaten up by fees, and you may be required to contribute more to keep the policy in force (FINRA).
Changing Cap and Participation Rates
These are not fixed for life. A company can lower them, reducing how much interest you earn—even in strong market years.
Tax Pitfalls with Policy Loans
Using loans for tax-free income can backfire if not managed properly. Unpaid loans can compound interest, shrink your death benefit, or cause a policy lapse with tax consequences.
Living Benefits and Legacy Planning Potential
Modern IULs often include living benefits through optional or built-in riders. These let you access part of your death benefit while you're still alive, providing financial relief during serious illness or disability:
Chronic illness: If you can't perform 2 of 6 ADLs (Activities of Daily Living)
Critical illness: For diagnoses like heart attack or cancer
Terminal illness: Life expectancy under 12–24 months
These benefits make IUL a potential fit for legacy planning, allowing you to protect your family, supplement retirement income, and prepare for medical uncertainty within one flexible product (NAIC).
Why You Must Review Your IUL Regularly
IULs are not “set-it-and-forget-it” policies.
Annual policy reviews allow you to:
See if performance matches original assumptions
Monitor rising COI and make funding adjustments
Reassess loan strategies
Evaluate if your policy still fits your financial goals
Catch issues early—before the policy becomes unsustainable
Final Thoughts
Indexed Universal Life insurance can be a powerful financial tool for the right individual when it comes to tax-advantaged growth, living benefits, and legacy protection. But it’s only effective if managed properly—and only if it’s a fit for your goals.
Own a policy? You owe it to yourself to schedule a policy review.
Considering one? Make sure it's being structured correctly from the start.
Let’s Review Your IUL—Together
I’ll help you understand what you actually have (or are being sold) and whether it still fits your goals.
References:
Investopedia: Universal Life Overview
Investopedia: Indexed Universal Life Explained
FINRA: Understanding IUL Insurance
InsuranceNewsNet: National Life Lawsuit
Forbes: Indexed Universal Life Guide
