Understanding Index Universal Life Insurance Policy: A Comprehensive Guide

Shawn Plummer

CEO, The Annuity Expert

Navigating the labyrinthine world of life insurance can feel intimidating, especially when acronyms like IUL start flying around. That’s Indexed Universal Life insurance, by the way. But don’t fret! Today, we will break down everything about Universal Index Life Insurance, from its core components to its operation mechanism and everything in between. By the end of this blog, you’ll be well-versed in the intricacies of this unique insurance tool used to increase the death benefit amount for your loved ones.

Understanding Universal Index Life Insurance

Universal Index Life Insurance (Indexed Universal Life Insurance or IUL Life Insurance) is a specific type of permanent life insurance that intertwines the security of life cover with the potential for cash value growth linked to a stock market index. An IUL policy offers a unique mix of flexibility and potential for higher returns, making it a valuable asset in one’s financial planning toolkit.

Index Universal Life Insurance Cost

Diving Deeper into How IUL Works

At its most basic, an Indexed Universal Life Insurance policy involves two primary components: a death benefit and a cash value component. The premiums you pay into the policy partially go toward maintaining the death benefit, while the rest contributes to the cash value account.

  • Death Benefit: This is the core of any life insurance policy. In the case of an IUL, you can adjust your death benefit to fit your ever-evolving needs.
  • Cash Value Growth: What sets IUL apart is the cash value component. Here’s where “index” in index life insurance comes into play. Your cash value can grow based on the performance of an external market index like the S&P 500 without the risk of losing money to stock market volatility.

The Unique Mechanics of Cash Value Accumulation

Index universal life insurance doesn’t invest your cash directly into the stock market. Instead, it uses a formula linked to a stock market index’s performance to calculate your cash value growth. It’s crucial to note that there’s typically a cap on maximum growth, but a floor protects you from negative market performance.

As you probably know, the stock market is very volatile, but fortunately, cash values in indexed universal life policies are not directly linked to them, so they are not as much affected by market fluctuations as other life insurance policies (such as variable life insurance).

It is not consumers who invest directly in that index – the life insurance company evaluates the account’s credit based on the index’s rate of return. When the index gains value, cash value does so as well. To protect the holders of indexed universal life policies from a drop in the index, there is a “floor.” The interest rate credited to the account cannot go lower than the floor, and it is frequently 0%. For example, if the index loses 7%, 0% will be credited, and the cash value will not lose 7%.

Interestingly, it is possible to borrow against cash value through a policy loan. What’s more, you are also allowed to withdraw a cash value portion. When you pass away, your beneficiaries will still get a death benefit but keep in mind its amount will be smaller if there are any unpaid loans or if you have taken any withdrawals.

Depending on what a particular insurance company offers, there are often multiple indices to select from. Moreover, most IUL insurance policies also provide a declared (fixed) interest rate variant apart from the index-linked investment.

The Factors Affecting Gains and Losses

You need to be aware that the cash value of indexed universal life insurance does not reflect all the index’s gains and losses. For more precise calculations, you need to take into account the following factors:


The minimum rate credited to your cash value is called a floor. It can be 0%, serving as protection from the index’s losses. The floor is guaranteed and not subject to any changes throughout the whole time you are the policy owner.


You need to take into consideration that typically, there is also a cap, preventing your cash value from exceeding a certain percent, even in the case of your index going above that limit. For instance, if your cap is 8%, and the index increases to 10%, the cash value tied to that index rises by 8%. It is worth knowing that the cap is not guaranteed and can be modified throughout the policy ownership.

Participation Rate

A participation rate is another factor affecting your cash value gains. It is the portion of your index’s return set by the life insurance company as credited to your account. Usually, it ranges from 25% to over 100%. In the case of a 100% participation rate, all the interest obtained by your investments (up to your cap) will be yours.

If the participation rate is, let’s say, 30%, and the index gained 10% in a particular month, you will, in fact, get 3% for that period. Keep in mind that the cash value earnings are most commonly credited to your account yearly or even every five years (depending on what “segment period” you chose), even though the growth is normally tracked monthly.

As a result, there will be no earnings presented in your Annual Policy Statement, but it does not mean your policy is not working as it should. You just need to wait until the end date of a previously established segment period.

To sum up, the floor will remain the same throughout the whole life insurance policy, while the cap and/or the participation rate can be changed by the insurance company in accordance with the market condition fluctuations (including changes in prevailing interest rates, the prices of options in the derivatives market, and the extent of equity market volatility.

Breaking Down Index Universal Life Insurance Cost

Understanding the cost of an IUL policy can be complex because it combines insurance and investment elements. The cost is generally determined by several factors, including your health, age, the death benefit you choose, and the policy’s specific terms. Regular reviews of your index universal life insurance policy are advisable to ensure it continues to meet your financial objectives and remains cost-effective.

The Role of Premium Flexibility

IUL policies provide flexible premiums – a significant advantage over other insurance types. You can adjust your premiums within specified limits; you could skip premium payments if there’s sufficient cash value.

Example: John’s finances change five years into his policy, and he needs to reduce his premium payments. With his indexed universal life insurance policy, he can do this because of the premium flexibility feature. He can lower his premium payments as long as they are above the minimum amount the life insurance company sets.

Indexed Universal Life Insurance

Advantages and Considerations of Indexed Universal Life Insurance

An indexed universal life insurance policy can offer financial protection and potential cash value growth for your loved ones. However, it’s essential to remember that potential growth is not guaranteed, and higher costs can be associated with IULs compared to other permanent life insurance options. Therefore, it’s crucial to thoroughly evaluate your financial goals and risk tolerance before committing.

Indexed Universal Life Insurance vs. Other Life Insurance Policies

In contrast to other kinds of life insurance, the value of an IUL policy is tied to an index associated with the stock market. As a result, the returns may be different, depending on how well the underlying index performs.

You can also consider different types of life insurance policies, including:

  • Whole life insurance. This kind of policy is more constant, and it continues through the entire life of the policyholder as long as they pay the premiums. The policy’s value increases in accordance with an established schedule, and there are not as many fees as in the case of an index universal life insurance. However, note that whole life insurance does not allow for flexible premiums.
  • Term life insurance. In such a policy, the death benefit is stable during a fixed period (typically 10-30 years). This type of insurance is often considered to be one of the cheapest and the simplest, but take into account that the cash value will not accumulate in this case.
  • Variable life insurance. Even though this policy is more complex than IUL insurance, it also provides you with more flexibility. A variable policy’s cash value can be affected by how particular stocks or other securities perform. More importantly, your premium can also be changed, so it is generally riskier than other types of life insurance.

IUL Calculator

Use our calculator to compare the best IUL policies for permanent coverage with whole life insurance, then compare with term life insurance.

If you need help finalizing your estate plan affordably, we recommend the following:

How To Open An Index Universal Life Insurance Policy.

Next Steps

The beauty of an indexed universal life insurance policy lies in its flexibility and the potential for cash value growth linked to market performance. It can serve as a unique financial tool, providing both a safety net for your loved ones and a method for cash accumulation. However, just like any financial product, an IUL isn’t one-size-fits-all. Contact our financial advisor below to ascertain if this policy fits your financial strategy.

Index Universal Life Insurance Policy

Indexed Universal Life Insurance Quotes

Contact us if you want an IUL quote or need help purchasing a life insurance policy. The service is free of charge.

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Frequently Asked Questions

What is the best-indexed universal life insurance?

North American and Nationwide are the best-indexed universal life insurance plans. Due to low premiums and A+ financial ratings from A.M. Best, these companies are considered some of the finest universal life insurance policies indexed.

What is the IUL cash reserve?

IUL cash reserve is a feature of indexed universal life insurance. It’s a savings component that allows policyholders to accumulate cash value over time. The cash reserve is typically invested in indexed accounts and is accessible to the policyholder through withdrawals or loans.

How much does Indexed Universal Life Insurance (IUL) cost?

Indexed universal life insurance is expensive and involves potentially higher premiums. Namely, the monthly premiums paid to the insurer can cost between $300 and $10,000.

Is IUL insurance subject to taxes?

Even though you have the possibility to take out money from your cash value in an indexed universal life policy, bear in mind that it will be taxable. For example, you are allowed to withdraw up to your basis (meaning the money you have paid into the IUL policy) tax-free. Nevertheless, anytime you withdraw a portion of your investment gains before the policy matures, this money will add to your income taxes for a particular tax year. On top of that, borrowing against the cash value can also be considered a taxable event. If you allow the loan interest to exhaust the present cash value, the policy can be terminated, and you will have to pay taxes on the loan balance.

Why is IUL a bad investment?

While IUL offers the potential for high returns and protection against loss through the accumulation of cash value, it can be a poor investment for some due to its complexities and costs. The returns are often capped, limiting the benefit from significant market upturns. It can be more expensive than traditional life insurance policies, and its ties to the stock market can make understanding it quite complex. Also, the flexibility to pay premiums can lead to policy lapse if not properly managed.

Related Reading

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost if you purchase a policy. It helps us keep the lights on!

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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