Many people wonder if Indexed Universal Life (IUL) Insurance can truly protect both their family and their finances. While IULs are often advertised as a way to benefit from stock market gains without the risk of losses, the truth is more complicated. Recent data from Insurance Journal’s News shows that IUL new premiums reached $3.9 billion last year, up 4% from the previous year, and policy counts increased by 10%. In the first quarter of 2025, new premiums grew by 11% to $959 million, and policy counts rose 7%, with most carriers reporting higher sales. Much of this growth is driven by marketing that highlights the potential for market-linked gains without downside risk, but the actual picture is more complex.

IULs offer permanent life insurance along with a cash value that grows based on a market index, usually the S&P 500. However, growth is limited by caps, participation rates, and fees. This article will help you understand how IULs work, how their features interact, and when they might be helpful or too complicated compared to simpler options.

Key Takeaways

• IUL insurance combines lifelong coverage with a cash value linked to a market index, subject to caps and participation limits.
• Returns do not match the index exactly. The credited interest depends on the policy’s specific terms.
• Policies can have high administrative costs, affecting long-term growth.
• IULs may serve specific estate or tax planning needs, but are not universally beneficial.

How IUL Insurance Works

An IUL policy offers a death benefit, which is the main purpose of life insurance, and a cash value account that earns interest based on a chosen market index. Unlike investing directly in the market, the cash value is not invested in stocks. Instead, the insurer credits interest using a formula linked to the index’s performance.

Two key features define how much growth is credited:

• Participation rate – The percentage of the index gain applied to the cash value. For example, an 80% participation rate means an index gain of 10% would credit 8% interest.
• Cap rate – The maximum credited interest, even if the index return is higher. For instance, if the cap is 9% and the index returns 12%, only 9% would be credited.

Most policies also have a floor rate, often set at 0%, so the credited interest cannot go below zero. However, fees can still reduce your cash value in years when the market is down.

Comparing IULs to Other Permanent Policies

Compared to whole life insurance, IULs offer more flexibility in how interest is credited, but less predictability in long-term growth. Unlike variable universal life insurance, IUL cash value is not directly invested in market subaccounts, which removes exposure to full market losses but also limits upside potential.

Why it matters: Knowing these differences can help you decide if an IUL fits your goals, whether you want steady, predictable growth or are interested in index-linked returns with certain limits.

Common Myths About IUL

Despite their growing popularity, IULs are often misunderstood. Here are a few frequent misconceptions:

• Myth: “IULs deliver the same returns as the stock market.”
• Reality: Returns are shaped by caps, participation rates, and crediting methods — they do not match the index itself.
• Myth: “The floor rate means you can’t lose money.”
• Reality: While credited interest may not be negative, fees and charges can still reduce your cash value.
• Myth: “Once purchased, the terms never change.”
• Reality: Insurers can change caps and participation rates within the contract’s rules, which can affect how much your policy grows.

By clearing up these myths, investors can better understand both the benefits and the limits of IULs. For example, Jane and Tom bought an IUL hoping for strong gains without risk. They were surprised when rising fees and changing participation rates reduced their returns over time. Their experience shows why it’s important to know all the details before choosing an insurance or investment product. Stories like theirs help make the complexities of IULs easier to understand.

Proceed with Caution: Risks and Misrepresentations in IUL Sales

Indexed Universal Life (IUL) insurance is often promoted with marketing language that can exaggerate benefits and minimize risks. While these policies can serve specific estate or tax planning needs, most investors should understand the potential drawbacks before committing.

Misleading illustrations and projections

• Overly optimistic assumptions – Many policy illustrations use strong bull-market periods to project future growth, creating unrealistic expectations of steady returns.
• Ignoring volatility – A “0% floor” is sometimes presented as protection against loss, but in reality, cash value may not grow in down years while fees continue to reduce account balances.
• Non-guaranteed vs. guaranteed values – Sales materials often highlight attractive non-guaranteed columns, while guaranteed projections may show slow or even negative accumulation over time.

High and rising fees

• Cost of insurance (COI) – Unlike term insurance, COI in IUL policies increases with age. Over time, this rising cost can erode the cash value and cause the policy to lapse if not funded aggressively.
• Premium loads and surrender charges – A portion of each premium goes to commissions and administrative expenses, and cancelling a policy early can trigger surrender fees lasting 10–15 years.

Limits on market-linked growth

• Cap rates and participation rates – Policies typically cap credited returns (e.g., 10% maximum) and may credit only a fraction of index gains.
• Dividends excluded – Since index credits usually exclude dividends, total returns are lower than the index itself.

Policy loans and the “be your own bank” pitch

• Loans reduce the death benefit – Policy loans are not free income; they are advances against the death benefit, and unpaid balances reduce what beneficiaries receive.
• Risk of lapse – If loans exceed the cash value, the policy may collapse, potentially creating a taxable event and leaving the policyholder with unexpected liabilities.

Contract Complexity and Cost Impact

IULs can be complex to evaluate because of layered costs:

• Administrative fees
• Cost of insurance charges (which rise with age)
• Rider fees for optional benefits

Over time, these charges can significantly reduce the policy’s net cash value growth, especially in years when credited interest is low. Some policies also allow loans or withdrawals from the cash value, but these reduce the death benefit if not repaid.

• Hypothetical: A policy with a $500,000 death benefit and $20,000 annual premium could show attractive projections if the assumed crediting rate is 6–7%. But if the insurer lowers cap rates or fees are higher than projected, the actual accumulation could be substantially less, impacting both living benefits and death benefit longevity.

When IULs Can Add Value

An IUL may be worth considering in specific contexts, such as:

• Estate planning strategies where a permanent death benefit offsets estate taxes.
• High-income households seeking additional tax-deferred growth outside retirement accounts.
• Legacy planning for dependents or charities, where the death benefit is a priority.

In these situations, flexible premium payments and index-linked crediting can be useful, but only if you understand the terms and are comfortable with the limits.

When Simpler Alternatives May Be Preferable

For many people, term life insurance plus a straightforward investment portfolio can meet both protection and growth needs with lower cost and greater transparency. This approach separates the insurance and investment functions, making it easier to adjust each independently.

So what? If the primary goal is market-based growth rather than permanent coverage, an IUL may be more expensive and less efficient than investing directly while holding separate life insurance.

• Final Insight: Before choosing an IUL, be clear about your insurance and investment goals. Consider whether the benefits in your situation are worth the complexity and cost. An IUL is not always good or bad; it is a specialized tool that works best in certain situations and can be a poor fit if misunderstood. The best decisions come from comparing it to simpler options, looking at different scenarios, and getting advice from a qualified professional who can explain the pros and cons clearly.