Indexed Universal Life is a type of permanent life insurance that offers lifelong protection with a cash value component that grows based on the performance of a stock market index (like the S&P 500), but with downside protection.
Key Benefits
- Lifetime death benefit protection
- Cash value growth potential linked to market indices
- Downside protection with 0% floor
- Tax-free policy loans and withdrawals
- Flexible premium payments
- No contribution limits (unlike IRAs and 401ks)
- No required minimum distributions
- Potential supplemental retirement income
How IUL Cash Value Growth Works
Your cash value is credited based on the performance of a chosen index:
Upside Participation
When the index performs well, your cash value receives a credit (typically up to a cap of 10-14%). You participate in market gains without directly investing in the market.
Downside Protection
If the index performs negatively, your cash value is protected with a 0% floor. You don’t lose money due to market downturns.
Example Scenario
- S&P 500 gains 15% → Your cash value credited 12% (at cap)
- S&P 500 gains 8% → Your cash value credited 8%
- S&P 500 loses 20% → Your cash value credited 0% (protected)
Tax Advantages of IUL
Tax-Deferred Growth
Cash value grows without annual taxation, allowing for compound growth.
Tax-Free Access
Access your cash value through policy loans and withdrawals without triggering taxes (when structured properly).
Tax-Free Death Benefit
Your beneficiaries receive the death benefit income tax-free.
Who Should Consider IUL?
- High-income earners who’ve maxed out retirement contributions
- Business owners seeking tax-advantaged savings
- Individuals wanting supplemental retirement income
- Those seeking permanent life insurance with growth potential
- People concerned about market volatility
- Estate planning and wealth transfer needs
IUL vs Other Retirement Vehicles
| Feature | IUL | 401k/IRA | Roth IRA |
|---|---|---|---|
| Contribution Limit | None | $23,000/year | $7,000/year |
| Tax-Free Access | Yes (loans) | No | Yes (age 59½+) |
| RMDs Required | No | Yes (age 73) | No |
| Death Benefit | Yes | No | No |
| Downside Protection | Yes (0% floor) | No | No |
Important Considerations
IUL policies are complex financial products that require proper funding and long-term commitment. They work best when:
- You plan to fund the policy consistently for at least 10-15 years
- You have adequate emergency savings
- You’ve maximized employer-matched retirement contributions
- You understand the policy costs and structure
- You work with a licensed, experienced advisor