Indexed universal life insurance, or IUL, is permanent life insurance with cash-value interest crediting linked to an external market index under a contract formula. It does not invest directly in the index.
Indexed universal life insurance, or IUL, is permanent life insurance with universal-life policy mechanics and cash-value interest crediting linked to an external market index under a contract formula. The policy does not invest directly in the index. Crediting is limited by terms such as caps, participation rates, spreads and floors.
The insurer measures index performance according to the policy's crediting method and applies the contract's limits. A cap can limit credited interest above a stated rate. A participation rate can apply only part of the measured index gain. A spread can subtract from the gain. A floor can protect against a negative credited rate, but policy charges still continue.
No. A 0% index-crediting floor usually refers to the interest-crediting calculation, not the total policy value. Monthly insurance costs, expense charges, rider charges, withdrawals and policy loans can reduce cash value even when the index credit for a segment is zero.
IUL policies can include cost-of-insurance charges, premium loads, administrative expenses, rider charges and surrender charges. Some charges can change within contract limits. Because charges continue even during low-crediting periods, long-term policy performance depends on funding, credited interest, policy costs and how the policy is managed.
An illustration is a projection showing guaranteed and non-guaranteed policy values under specified assumptions. It is not a promise that the illustrated values will occur. The NAIC maintains rules governing life insurance illustrations, including indexed universal life illustration standards. Review the guaranteed columns separately from non-guaranteed projections.
Many IUL policies permit loans against available policy value. Loan terms differ by carrier and can affect credited interest, cash value and death benefit. Loans are not automatically tax-free in every circumstance. Excessive loans can contribute to lapse, and a lapse with gain may create a taxable event.
A policy can lapse when available policy value is insufficient to cover monthly deductions and required charges. Underfunding, lower-than-illustrated crediting, higher charges, withdrawals, loans or long duration can contribute. IUL should be reviewed periodically using current in-force information rather than relying only on the original illustration.
IUL may be considered by someone who needs permanent death-benefit protection, can fund the policy consistently, understands non-guaranteed projections and wants flexible policy mechanics. It is generally not appropriate for someone who needs the lowest-cost temporary death benefit or who is uncomfortable monitoring a complex long-term contract.
IUL is more complex than term or traditional whole life. Crediting terms can change within contractual limits, illustrations use assumptions, policy charges continue regardless of index performance, and underfunded policies can lapse. Marketing that presents IUL as a stock-market investment or guaranteed retirement account is misleading.
Whole life generally emphasizes fixed guarantees and scheduled premiums. IUL generally offers more flexible funding and index-linked interest crediting but has more variables. The appropriate choice depends on the need for guarantees, flexibility, affordability and willingness to monitor policy performance.
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Reviewed by James Woodley, licensed insurance advisor · Last reviewed
