Indexed Universal Life (IUL) insurance is a type of permanent life insurance that combines a death benefit with a cash value component tied to the performance of a stock market index, like the S&P 500. While it promises both life insurance protection and investment growth, IUL policies can be complicated, expensive, and often underperform compared to other investment options. Here’s what you need to know before considering an IUL policy.
How IUL Life Insurance Works
IUL life insurance offers a death benefit, which pays out to your beneficiaries when you pass away, along with a cash value that grows based on stock market index performance. Policyholders pay premiums, part of which goes toward the death benefit and policy fees, while the remainder funds the cash value account. Unlike investing directly in the market, your cash value earns returns based on a market index, often with caps on maximum returns and floors that limit losses.
Features of IUL Policies:
- Market-Linked Growth: The cash value grows based on index performance, subject to caps and participation rates.
- Premium Flexibility: You can adjust premium payments, but failing to pay enough can cause the policy to lapse.
- Death Benefit Options: Choose between a fixed death benefit or one that increases as the cash value grows.
Why We Don’t Sell IUL Policies
At Everyday Life Insurance, we believe that IUL policies are rarely the best financial choice. Here’s why:
- High Fees and Complexity: IUL policies come with a range of fees, including administrative charges, cost of insurance, and policy management fees. These costs can eat into your cash value growth, leaving less for your beneficiaries.
- Limited Investment Potential: While IUL policies offer market-linked returns, they often cap maximum gains. You might miss out on the full market upside while still paying high policy fees.
- Better Alternatives Exist: For most people, buying a term life insurance policy and investing the difference in tax-advantaged accounts like 401(k)s, IRAs, or index funds will provide more financial security and investment growth.
- Policy Lapse Risk: If you don’t keep up with premiums or the policy’s returns fall short, your policy could lapse, leaving you without coverage and limited cash value.
Jake’s Take: “I believe that if a financial product isn’t easy to understand, then you probably should avoid it. As a financial executive with a Masters in Business Administration and with over 25 years in the industry, I personally find IUL’s too complicated to be useful in my personal portfolio and I have yet to recommend an IUL to any of the many clients I have served over the years.”
When IUL Might Make Sense
IUL might be worth considering only if:
- You’ve Maxed Out All Other Tax-Advantaged Investments: If you’ve fully funded your 401(k), IRA, HSA, and other tax-advantaged accounts, an IUL could be an additional tool.
- You Have Significant Disposable Income: Given the high costs and complexity, IUL is generally only suitable for people in higher tax brackets for whom any tax benefit can be substantial enough to outweigh the relatively higher fees and mediocre investment potential.
A Smarter Approach For Most: Buy Term and Invest the Rest
For most people, a better financial strategy is to buy an affordable term life insurance policy and invest the savings from lower premiums into traditional investment accounts. Term life insurance from Everyday Life Insurance can start as low as $4 per month, providing straightforward coverage while you build wealth through tax-advantaged investments.
Try Our Online Life Insurance Calculator
Before considering an IUL policy, explore more straightforward, affordable, and effective options like term life insurance. Whether you have never had a life insurance policy before or are looking to maximize your investments, we encourage you to try our online calculator. It’s free, totally anonymous, and doesn’t even require an email address. See what offers are available to you today.
