When you’re planning for your financial future, Indexed Universal Life (IUL) insurance might pop up as an option. On the surface, it sounds pretty great, right? You get life insurance and the chance to grow your money alongside the stock market. But let’s be honest—if it sounds too good to be true, there’s probably a catch. And in the case of IULs, there are quite a few.

In this article, we’re breaking down the real risks of IULs in plain, simple language. I’ll walk you through what you need to watch out for, share some relatable examples, and help you figure out if this type of policy makes sense for you.

Key Takeaways

• IULs combine life insurance with a savings component, but the risks and fees can outweigh the benefits for many people.
• Your returns are capped, so you miss out on the market’s best gains.
• High fees and confusing terms can make IULs expensive and hard to understand.
• For most people, simpler options like IRAs or index funds might deliver better results with fewer headaches.

What Is an IUL, and Why Do People Consider It?

An Indexed Universal Life (IUL) policy is a type of permanent life insurance that also includes a savings or investment-like component. Instead of directly investing in the stock market, the cash value of the policy grows based on the performance of a market index, like the S&P 500.

Here’s a quick breakdown of how it works:

• Premium Payments: Part of the money you pay goes to the life insurance coverage, and the rest goes into the cash value portion.
• Cash Value Growth: This grows based on the market index, but there’s a cap on how much you can earn each year.
• Borrowing: Over time, you can borrow against the cash value if you need extra funds.

On paper, this sounds like a win-win, but the reality can be more complicated—and costly.

Why IUL Might Be a Bad Investment

1. Capped Returns Hold You Back

One of the big selling points for IULs is that you can benefit from market growth without worrying about losses. But here’s the catch: your upside is capped.

Let’s say the S&P 500 has a phenomenal year and returns 15%. With an IUL, your growth might be capped at 6-8%, so you miss out on most of those gains.

Hypothetical Example:Imagine the S&P 500 grows 12% in a year. If your IUL caps returns at 8%, your cash value only grows by 8%. Where does the rest go? Straight to the insurance company.

Over time, those missed gains can really add up and hold back the growth of your savings compared to investing directly in low-cost index funds.

2. Fees Can Drain Your Money

IUL policies are expensive—plain and simple. Between administrative costs, premium charges, and the cost of insurance, a big portion of your money doesn’t even make it into the cash value.

Here are some common fees you might see:

• Premium Loads: A percentage of every premium payment gets taken off the top.
• Cost of Insurance (COI): This fee increases as you get older, eating into the cash value.
• Administrative Fees: Ongoing charges for keeping the policy active.

Hypothetical Example: You pay $10,000 into your IUL each year. If 15% goes toward fees, only $8,500 is left to actually grow. Over time, those fees add up and take a major bite out of your returns.

3. Borrowing Comes with Strings Attached

IULs let you borrow against your cash value, which sounds flexible and useful. But borrowing can get tricky if you’re not careful:

• You Pay Interest: Loans aren’t free—you’ll pay interest on what you borrow.
• Risk of Lapse: If the loan balance gets too high, it could eat into your cash value and cause the policy to lapse.
• Tax Consequences: If the policy collapses, the loan amount could be treated as taxable income.

Hypothetical Example: Let’s say you borrow $20,000 from your IUL and don’t pay it back. As interest builds up, your cash value shrinks. If the policy lapses, you lose your coverage and get hit with a tax bill for the loan amount.

4. IULs Are Complicated and Confusing

Between the caps, floors, fees, and borrowing rules, IULs can feel like a financial maze. If you don’t fully understand how the policy works, you might not realize how much you’re paying in fees or how little your cash value is growing.

For most people, simpler options like IRAs or 401(k)s are easier to manage, cheaper, and deliver more transparent results.

5. There Are Better Alternatives

If you’re looking for ways to save for the future, IULs aren’t your only option. In fact, they might not even be your best option.

What to Consider Instead:

• 401(k) or IRA: These tax-advantaged accounts are simple, low-cost, and often come with employer matching. Tip: try a 401(k) software
• Index Funds and ETFs: These give you direct exposure to market growth without the caps or high fees.
• Term Life Insurance: If life insurance is what you need, term policies are much cheaper, and you can invest the savings elsewhere.

Who Might Still Consider an IUL?

To be fair, IULs aren’t all bad. They might work for:

• People who love simplicity, need life insurance, and also want some cash value growth.
• Extremely risk-averse investors who want market exposure without losses.
• High-income earners who have maxed out their retirement accounts and need another tax-advantaged option.