*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.
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Updated: November 7, 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.
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 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 includes 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.
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, causing loss of the 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. Match the selection to how much market volatility you can handle.
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 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
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 |
The rates above are based on average quotes for smokers and nonsmokers who have average weight and health ratings. Actual rates will differ based on your age, health, coverage amount, funding level and index options.
IUL Fees and Charges
Indexed universal life insurance policies include costs beyond premium payments. These internal charges reduce cash value growth and influence the policy’s long-term performance. Knowing how these fees work helps you set realistic expectations about potential returns.
Administrative and Service Fees
- Monthly Policy Administration: Insurers apply a fixed monthly charge for maintaining the policy, preparing statements, and providing customer service. This fee applies regardless of premium payments or account performance.
- Premium Load Charges: Each premium payment is reduced by a percentage before it enters your cash value account. These deductions lower the portion available for growth from the start.
- Transaction Fees: Partial withdrawals, policy loans, or changes to premium schedules may create extra costs. Some insurers also charge for moving funds between index account options.
Investment-Related Charges
- Index Crediting Spreads: Some insurers reduce credited interest through a spread. For example, if the index earns 8% but your credited rate is 6%, the 2% difference represents an indirect cost.
- Cap and Participation Rate Limits: Caps and participation rates restrict how much of the index return applies to your account. For example, a 90% participation rate means you receive only 90% of the gain, with the rest acting as an embedded cost.
Asset-Based Charges
Ongoing annual charges are applied as a percentage of your cash value. These costs compound over time and reduce overall accumulation compared with direct market investments.
MONEYGEEK EXPERT TIP
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
- 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.
- 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.
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.
- 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.
- 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.
- 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.
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.
- 1Research each provider's reputation
Before selecting a company, check potential insurers' financial strength and customer service ratings. See our guide to the best indexed universal life insurance companies.
- 2Consider 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.
- 3Work 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.
- 4Review your policy
Thoroughly read and understand your prospective policy, including fees, caps, floors and potential 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.
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
We answer common questions about IUL to help you understand this coverage and determine if it benefits you.
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 Protective, Pacific Life and Legal & General.
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 the loan interest, it grows and risks policy lapse, which 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.
Do IUL premiums increase?
IUL premiums are flexible, allowing payment adjustments based on your finances. You must meet minimum premium requirements to keep the policy active and maintain its benefits.
Who should buy indexed universal life insurance?
IUL works best for high-net-worth individuals who've maxed out retirement accounts and want tax-advantaged growth with downside protection. It's ideal if you're planning estate transfers, value tax-free policy loans and can afford higher premiums long-term.
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 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
Indexed universal life insurance combines permanent coverage with investment potential, but complexity makes comparison challenging. You're choosing between cash value growth strategies and premium flexibility options while evaluating companies' financial strength and customer service quality.
Our evaluation incorporated 248,399 life insurance cost data obtained through online quotes.
Standard Profile for Rate Comparison
We used this consistent profile to obtain life insurance quotes: a 40-year-old nonsmoking male (5'9", 160 pounds) with average health. All premiums reflect this standard profile unless noted otherwise. We modified age, gender, height, weight, tobacco use and health rating to collect diverse quotes and determine the best companies for different customer types.
This data collection revealed pricing trends and patterns that helped us calculate projections and extend our analysis beyond the initial quote samples.
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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!
He writes about economics and insurance, breaking down complex topics so people know what they're buying.