Indexed Universal Life (IUL) Insurance

Indexed universal life insurance (IUL) is a type of permanent life insurance policy composed of a death benefit component and a cash value component. The cash value comes from equity index accounts, which the IUL policyholder chooses. Because index universal life insurance's cash component is investments, the value can rise or fall depending on the market. However, an IUL insurance policy is still one of the less risky investment type policies available.

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent

UPDATED: Jul 19, 2021

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Quick Facts

  • Indexed universal life insurance (IUL) is a permanent life insurance policy
  • IUL policies have both a death benefit component and a cash value component made up of equity index accounts
  • The cash value component may rise or fall depending on the market, but it less risky than other types of investments

If you are considering buying an indexed universal life insurance (IUL) policy, you should familiarize yourself with how this policy works. Life insurance is a long-term commitment, so canceling it can be tricky.

Read on to learn about IUL FAQ, such as how does indexed universal life insurance work and the advantages/disadvantages of indexed universal life (IUL) insurance.

Use our free tool above to start shopping for an affordable indexed universal life insurance policy.

How Indexed Universal Life Insurance Works

So what is indexed universal life (IUL) insurance? A type of universal life insurance, indexed insurance has a cash value component. This cash value consists of index investments, such as an equity index account like the S&P 500.

The key features of indexed universal life insurance are that these types of investments have much less risk as they are based in a more stable market.

While they are a little riskier than a regular universal policy, they are not nearly as risky as a variable insurance policy, where the cash component is invested into the stock market.

The nice part of an IUL policy is that customers get to chose which equity accounts to invest in, so you have control over where your money goes.

The cash value is also separate from your death benefit, so any gains or losses you make with your equity accounts won’t affect the amount of your death benefit.

Indexed universal life insurance is also a permanent life insurance policy, unlike types of term life insurance. This means there is no end date to the policy unless you chose to cancel it.

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Is indexed universal life insurance a good investment?

It really depends on your individual needs and finances. If you are looking for a permanent life insurance policy that also has the potential to earn you money for retirement, an IUL policy may be right for you.

You can withdraw or take out a loan on your cash value, meaning it can be a nice nest egg for you.

The Insurance Information Institute (III) found that in in 2018, life insurance companies paid $350 billion to policyholders who “terminated their policies early or withdrew cash from their policies.”

However, when you die, only the death benefit will go to your beneficiaries. Sometimes insurers will offer an option for the cash value to go to your beneficiaries, but this means paying much higher premiums.

What is the difference between universal life and indexed universal life?

The difference between universal life and indexed universal life is that universal life insurance policy is a blanket term for the three types of universal life insurance: variable, indexed, or guaranteed.

There are multiple different ways to invest your cash value under universal life insurance, such as putting it into the stock market, equities, or saving-type accounts.

So indexed universal life insurance is one type of universal life insurance, meaning there isn’t a difference between them, as universal life insurance is a blanket term that isn’t actually it’s own policy.

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Pros and Cons of Indexed Universal Life Insurance

So should you get an indexed universal life insurance policy? Before you start shopping at indexed universal life insurance companies, take a look at the cons below.

  • Investment earning cap. Your insurer will have a cap on how much you can earn with your equity funds. Anything over the percentage specified they will take.
  • No fixed premiums. You may not be paying the same premiums 10 years later, as premiums may rise (depending on the market).
  • No guarantee of earnings. While equity accounts are lower risk than other investments, there is still some risk involved. If the equity accounts do poorly, you may end up making much less than anticipated.

Now that you are aware of the problems with indexed universal life insurance, let’s look at the pros.

  • Death benefit is untouched. Even if the cash value portion of your policy performs poorly, your death benefit will stay at the same value (as long as you are keeping up with your premium payments).
  • Withdrawals are tax-free. As long as the withdrawals you make are less than the premiums you put into the policy, you won’t have to pay taxes on them.
  • Less risk than other investment life insurance policies. As we stated earlier, even though there is some risk involved, an index policy is a much lower risk than other investments.

We hope this cleared up the indexed universal life insurance pros and cons for you, so you can have a better idea of whether an IUL policy is right for you.

We also highly recommend reading index universal life insurance reviews before purchasing a policy, so you can see firsthand what other customers think.

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Canceling Indexed Universal Life Insurance

You should only cancel a life insurance policy if you no longer need it. If you can’t afford the premiums, consider lowering your death benefit to reduce premiums. If you do truly no longer need index universal life insurance, you can surrender your policy.

You should receive your cash value when you cancel your policy, but this may be less than what you put into a policy. Insurers may also charge a significant cancellation fee if you cancel before a certain amount of time, such as before 10 years is up.

There are also options to surrender to a third party for a buyout sum. The third-party will take over paying premiums, but they will get your death benefit.

No matter what you chose, read the fine print and make sure that your refunded cash value or buyout sum is fair.

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