*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?
Indexed universal life insurance combines coverage with investment features, offering flexibility, potential growth and tax advantages.
Find out if you're overpaying for life insurance below.
Select age group
Updated: December 4, 2025
Advertising & Editorial Disclosure
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.
IUL is insurance with investment features, not a direct investment product. While it includes investment-like features, it remains primarily an insurance product with associated insurance costs and regulations.
What Is an Indexed Universal Life Insurance Policy?
Indexed universal life insurance (IUL) is a permanent life insurance policy with a death benefit and a cash value component tied to a market index like the S&P 500. The cash value can grow based on index performance while protecting you from market losses.
IUL policies offer flexible premium payments and adjustable death benefits. Your cash value grows tax-deferred, and you can access funds through policy loans or withdrawals. You gain exposure to market growth without buying stocks directly.
Cash value is the investment portion of your life insurance policy that accumulates over time. Unlike term life insurance, which includes only a death benefit, permanent life insurance policies like IUL build cash value you can access through policy loans or withdrawals during your lifetime, though this may reduce your death benefit and could have tax implications.
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 cash value 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.
- 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, resulting in loss of your cash value and death benefit.
Indexing and interest crediting
IUL links cash value growth to stock market indexes. Insurance companies decide which indices are available. Some give one option; others offer multiple choices. Choose based on your tolerance for market volatility.
Popular indexes for IULs include S&P 500, NASDAQ-100, Dow Jones Industrial Average (DJIA), Russell 2000 and MSCI EAFE.
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
IUL policies let you adjust how much you pay each month. Having a tough financial year? Pay less. Got a bonus? Pay more. Traditional life insurance doesn't offer this flexibility.
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
In an IUL policy, withdrawals from the cash value are tax-free up to the premiums you've paid. 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), loans and withdrawals are taxed as ordinary income first (rather than being tax-free), and early withdrawals may incur a penalty. An MEC occurs when premiums paid exceed federal tax limits, changing how the policy is taxed.
Indexed Universal Life Insurance Cost
IUL premiums vary based on age, health, coverage amount and your chosen policy features. Based on MoneyGeek’s 2025 analysis of quotes from major insurers, monthly cost estimates for a $500,000 IUL policy for healthy, 40-year-old nonsmoking applicants are $408 (men) and $335 (women). The table below shows average rates for different coverage levels and ages.
Data filtered by:
18
Female
No
| $100,000 | $9 | $109 |
| $250,000 | $23 | $272 |
| $500,000 | $45 | $544 |
| $750,000 | $68 | $817 |
| $1,000,000 | $91 | $1,089 |
| $1,500,000 | $136 | $1,633 |
| $2,500,000 | $227 | $2,722 |
*Rates are based on average quotes for smokers and nonsmokers with average weight and health ratings. Actual rates depend age, health, coverage amount, funding level and index options.
IUL Fees and Charges
IUL Fees and Charges
Indexed universal life insurance policies charge multiple fees beyond your premium payments. Internal charges reduce cash value growth and drag down long-term performance. Know these costs before buying.
Administrative and Service Fees
- Monthly policy administration: Insurers charge a fixed monthly fee for policy maintenance, statements and customer service, whether you pay premiums or not.
- Premium load charges: Each premium payment loses a percentage before entering your cash value account, reducing growth from day one.
- Transaction fees: Partial withdrawals, policy loans or premium schedule changes trigger additional costs. Moving funds between index account options can also incur fees.
Investment-Related Charges
- Index crediting spreads: Insurers reduce credited interest through a spread. An index earning 8% with a 6% credited rate means you lose 2% to indirect costs.
- Cap and participation rate limits: Caps and participation rates restrict how much the index return reaches your account. A 90% participation rate gives you only 90% of gains; the insurer keeps the rest.
Asset-Based Charges
Insurers charge ongoing annual fees as a percentage of your cash value. These costs compound over time and reduce accumulation compared with direct market investments.
HOW MUCH SHOULD YOU CONTRIBUTE TO AN IUL?
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.
Indexed Universal Life Insurance Pros and Cons
Pros and Cons
Pros of IUL
- 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 of IUL
- High costs and fees: Administrative expenses, surrender charges and hidden costs reduce your policy's overall value.
- Capped returns limit growth: IUL policies cap your returns (often at 10% to 12%), so you miss full market gains during strong years.
- Better alternatives for most people: Financial advisors recommend 401(k)s over IUL for most people because 401(k)s avoid the high fees and premiums. IUL mainly suits high-net-worth individuals who've maxed out other retirement options.
Types of IUL Strategies
IUL policies offer different strategies with distinct advantages and trade-offs:
- Max-funded IUL: Maximizes premium payments up to federal limits to grow cash value without triggering modified endowment contract (MEC) status. This builds cash value quickly, creating a financial asset you can access during your lifetime.
- Compound interest IUL: Uses compound interest to grow your policy's cash value over time. The account links to a favorable interest crediting method (how the insurance company adds growth to your cash value). Reinvesting earned interest grows cash value exponentially, boosting the policy's financial yield.
- Fixed-indexed universal life insurance: Links cash value to a fixed index rather than volatile equity markets for stable growth. This conservative approach delivers predictable returns and less risk for policyholders wanting stability over speculative gains.
- Equity-indexed universal life insurance: Links cash value growth to equity market performance for higher returns but more risk. Protective floors set a minimum interest crediting rate (usually 0%) to limit losses, but equity market exposure means your policy's value can swing substantially.
How to Choose an IUL Policy
Buying an indexed universal life insurance policy involves several steps. Requirements vary by insurer, but this process applies to most IUL policies:
- 1Research provider reputation
Check financial strength ratings, customer reviews and complaint ratios before selecting an insurer.
- 2Compare policy terms and investment options
Review premium flexibility, death benefit options and available indexes for linking cash value. Ask about caps, floors and participation rates.
- 3Work with a financial professional (optional)
IUL policies are complex. A financial advisor can explain policy details and help you determine if IUL fits your situation.
- 4Review your policy
Read all policy documents before signing, including fees, caps, floors and penalties for changes.
What Is an IUL: 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. IUL works best for high-net-worth individuals who've maxed out other retirement accounts and need additional tax-advantaged options for estate planning.
Financial advisors recommend simpler alternatives for most people: maximize 401(k) contributions, invest in low-cost index funds or buy term life insurance for pure protection. Consider IUL only if you can afford higher premiums and need its benefits over straightforward investment options.
Indexed Universal Life Insurance: FAQ
Answer to common questions about IUL:
Where can I open an IUL account?
Open an IUL account through any insurance company offering indexed universal life insurance, including Protective, Pacific Life and Legal & General.
How do IUL loans work?
IUL loans let you borrow against your policy's cash value without immediate tax liability as long as the policy stays active. Unpaid loan interest grows and risks policy lapse, which means losing coverage and paying taxes on the loan amount.
When can you withdraw from an IUL?
You can withdraw funds tax-free up to the total premiums paid once your IUL has sufficient cash value. Large withdrawals reduce the death benefit and can cause policy lapse.
Do IUL premiums increase?
IUL premiums are flexible. You can adjust payments based on your finances. You must meet minimum premium requirements to keep the policy active.
Who should buy indexed universal life insurance?
IUL works best for high-net-worth people who've maxed out retirement accounts and want tax-advantaged growth with downside protection. It's ideal for estate transfers, tax-free policy loans and long-term wealth building if you can afford higher premiums.
Who shouldn't buy indexed universal life insurance?
IUL may not be for you if you're young and should prioritize 401(k) matching, need guaranteed returns, want simple and affordable coverage or seek maximum investment returns. Term life insurance costs less for death benefits, while direct market investing offers uncapped growth without surrender charges.
Our Ratings Methodology
IUL policies promise cash value growth tied to market indexes while protecting against losses, but that protection comes with caps, fees and complexity. You need to know which insurers offer the best balance of growth potential, reasonable costs and reliable customer service before committing to decades of premium payments.
We gathered 248,399 life insurance quotes to identify patterns in IUL pricing and pinpoint which companies deliver the best value for specific customer profiles. This data revealed how factors like age, health status and tobacco use affect IUL premiums differently than traditional permanent life insurance.
Our Rate Comparison Approach
We used a consistent baseline profile to compare apples to apples: a 40-year-old nonsmoking male (5'9", 160 pounds) with average health. All premiums reflect this profile unless we note otherwise.
We then modified age, gender, height, weight, tobacco use and health rating to collect quotes across demographics. This showed us which insurers offer the most competitive rates for healthy applicants versus those with health conditions, a distinction for IUL, where higher premiums mean less money growing in your cash value account.
The data collection also revealed pricing trends that helped us calculate long-term projections. Since IUL performance depends heavily on how premiums compound over 20-30 years, understanding these patterns matters more than just comparing year-one costs.
Related Articles
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!
He writes about economics and insurance, breaking down complex topics so people know what they're buying.