What Is Indexed Universal Life Insurance?

Indexed Universal Life (IUL) insurance is a type of permanent life insurance policy that combines the features of traditional universal life insurance with the potential for cash value growth linked to the performance of a stock market index, such as the S&P 500.

How Does It Work?

As with universal life insurance, IUL policies have adjustable premiums. You can underpay or skip premiums, and you may be able to adjust your death benefit as well. What makes IUL different is the way the cash value is invested.

When you take out an indexed universal life insurance policy, the insurance company will help you select the index to use for all or part of the cash value account segment of your policy and your death benefit. When a premium is paid on the account, a portion pays the cost of insurance based on the insured's life. Any fees are paid, and the rest is added to the cash value.

The total cash value is credited with interest based on increases in an equity index (but isn't directly invested in the stock market). If you own an indexed universal life policy, you can likely borrow against the cash value accumulated in the policy. However, if you don't pay back your loans, they are deducted from the death benefit.

Key Features

Flexible premiums

As with standard universal life insurance, the policy holder can increase their premiums or lower them in times of hardship.

Tax-free growth and distributions

Indexed Universal Life (IUL) insurance policies allow the cash value to grow tax-free. The death benefit is also tax-free to beneficiaries.

Indexing option

Cash value, along with potential growth of that value through an equity index account. IUL insurance policies can track a number of well-known equity indexes, such as the S&P 500 or the Nasdaq-100 to earn interest credits.

Loan availability

With an Indexed Universal Life policy, you can take loans against the cash value, allowing your initial investment to continue growing while you use the loaned funds without immediate repayment obligations.

Face Value

Permanent, lifelong coverage when premiums are kept up to date.

401k vs IUL

Indexed universal life insurance (IUL) and 401(k) plans offer different benefits, each catering to specific financial needs and retirement planning objectives. IUL retirement plans combine life insurance with investment growth potential, providing a death benefit and the opportunity for tax-free income. A 401(k) is an employer-sponsored retirement savings plan that emphasizes long-term savings with potential employer-matching contributions.

Both IUL retirement accounts and 401(k) plans provide unique advantages. Deciding which option is better between the two requires careful consideration of various factors such as your risk tolerance, financial situation, and long-term goals.

Cash value accumulation

Amounts credited to the cash value grow tax-free in an IUL policy unlike a 401(k). The cash value can pay the insurance premiums, allowing the policyholder to reduce or stop making out-of-pocket premium payments.

Less risk

Since IUL policies are not directly invested in the stock market, this reduces the risk of losses. In most cases having a guaranteed minimum floor.

Easier distribution

The cash value in IUL insurance policies can be accessed at anytime without penalty, regardless of a person’s age.

Death benefit

IULs offer a death benefit that is permanent, not subject to income or death taxes, and not required to go through probate.

Unlimited contribution

IUL insurance policies have no limitations on annual contributions.

The Bottom Line

Indexed Universal Life (IUL) policies offer the security of life insurance combined with the potential to build cash value over time. They help grow your savings with tax advantages and provide flexible access to funds when you need them, making them a solid choice for both protecting your loved ones and planning for the future.