Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.

Compare indexed universal life insurance

Your life insurance returns are tied to the performance of an index, like the S&P 500.

Updated

Fact checked

By nature, life insurance is simple. You pay a premium to protect your family when you’re gone.
Indexed universal life insurance is a hybrid policy that lasts a lifetime and makes the most of stock market wins. But it’s complex, and your earnings are limited.

What is indexed universal life insurance?

Indexed universal life insurance (IUL) is a type of permanent policy that’s tied to an equity index, such as the S&P 500. Like all permanent policies, it lasts a lifetime and part of your premium is invested to give your policy a cash value. Rather than offering a fixed rate of return, your cash value pays a return based on the performance of that index.

Your insurer will set a minimum interest rate, though, so you won’t lose money. But if the market dips, your returns might be lower.

Once you’ve built up enough cash value, you can take out loans against your own policy, or use the cash to cover your premiums. If you decide to cash in your policy, you’ll get the cash value — but your beneficiaries won’t receive a death benefit when you die.

What’s an index?

An index measures the performance of a group of investments, like stocks and bonds. For example, the S&P is a stock market index that monitors 500 of the largest companies listed on the US stock exchange. It’s a good reflection of the state of the market. With IUL, your insurer doesn’t invest your money in the market. They use the index’s interest rate to come up with a rate for your policy.

How does indexed universal life insurance work?

IUL is essentially two products in one: a life insurance policy and an investment.

When you pay your premium, a portion pays for an annual renewable term life insurance policy, plus any admin fees. The rest goes towards the cash value portion of your policy, which earns interest based on the increases in an equity index — like the S&P 500 or NASDAQ-100. Some providers will allow you to choose multiple indexes, and allocate a certain percentage to each.

Insurers assess index performance each month. If the index performs well, those “gains” will be credited back to your policy on a monthly or annual basis. Let’s say the index jumped up by 5% from January 1 to January 31. Your insurer will multiply 5% by your cash value, and add the resulting interest to your cash value.

This is where it gets complicated: The gains are based on a “cap rate” or maximum interest rate, and a “participation rate” or a percentage rate set by your insurer. So, if the gain is 5% and below the cap rate, the participation rate is 50%, and the cash value of your policy is $15,000, the insurer will add $375 to the cash value.

On the other hand, if the index dips, your insurer won’t credit any interest to your cash value.

Compare life insurance rates

Compare quotes for life insurance policies starting at $15/month.
How do these quotes work?

Key features of indexed universal life insurance policies

These are the other features of IULs:

  • They offer permanent protection.
  • When you die, your beneficiaries will receive a guaranteed death benefit.
  • The premiums are flexible. You can adjust your payments to suit your situation.
  • The rates can increase over time. The older you get, the more you’ll pay.
  • You can change the death benefit. These policies give you the opportunity to increase or decrease the death benefit. The higher the death benefit, the more expensive your premiums will be.

Is IUL right for me?

For the average person, an IUL is unnecessarily complex. If you’re planning for retirement, you might be better off funnelling your savings into a 401(k) or IRA. While those accounts are subject to contribution limits and don’t have the same principal guarantees, you’ll see more money when the market is performing well.

However, if you’re a high-income earner, the tax benefits of an IUL may be worth the cost of the policy. The same goes for long-term investors who are okay with potentially low returns in less-than-stellar years.

Protect your loved ones
Compare affordable quotes from 12+ A-rated life insurance companies side-by-side.

Need help? Talk to a customer specialist

X

Advantages and disadvantages of IUL

Pros

  • Flexibility. You have the freedom to adjust your premiums and death benefit, and tap into your policy once you’ve accumulated enough cash value.
  • Account’s principal is guaranteed. Thanks to the minimum interest rate set by your insurer, you can take advantage of stock market returns without losing money.
  • Tax-deferred cash value. The cash value of your policy grows tax-deferred.
  • Unlimited contributions. Many investment vehicles have contribution limits, but IULs don’t.
  • Less risky than some other investments. If the index drops, it won’t decrease your cash value. In that way, IULs can be safer than investing in stocks. And if the market is strong, IULs can offer better returns than other types of universal life insurance policies.

Cons

  • Expensive. Premium policies are almost always more expensive than term life.
  • Hefty fees. IULs are associated with high sales and admin fees.
  • Cap on returns. To make money, your insurer sets a participation rate — which is a fancy way of saying they hold on to a portion of the gains.
  • Subject to the market. When the market’s good, an IUL can be a handy investment. But when the market’s performing poorly, your policy may pay lower returns than other permanent plans.
  • No dividends. If you’re with a mutual life insurance company, you won’t earn any dividends on their profits.

Compare universal life insurance

Name Product Issue age Minimum Coverage Maximum Coverage Term Lengths Medical Exam Required
Transamerica
18 - 75 years old
$25,000
$10,000,000
10, 15, 20, 25, 30 years
Depends on policy
Purchase a policy worth anywhere from $25,000 to $10 million, with the option to skip the medical exam. Get a free quote on Policygenius.
MassMutual
18 - 80 years old
$2,000
$10,000,000
10, 15, 20, 25, 30 years
Depends on policy
Purchase term life insurance up to age 80 with Finder's #1 ranked company. Get a free quote from this A+ rated insurer on Policygenius.
AIG
AIG
20 - 85 years old
$5,000
$2,000,000
10, 15, 20, 25, 30, 35 years
Yes
Buy term life insurance all the way up to age 85, and choose a policy that lasts up to an incredible 35 years. Get a free quote on Policygenius.
John Hancock
18 - 65 years old
$25,000
$1,000,000
10, 15, 20 years
Depends on policy
Score a low rate on term life insurance with discounts and rewards for your healthy habits. Get a free quote on Policygenius.
Guardian
18 - 75 years old
$250,000
$5,000,000
10, 15, 20, 30 years
Depends on policy
Buy a policy with a generous death benefit and one of the longest lists of unique riders. Get a free quote from this top brand on Policygenius.
loading

Compare up to 4 providers

Alternatives to indexed universal life insurance

If indexed universal life insurance isn’t quite right for you, look into these permanent policies:

  • Whole life. The most basic lifelong policy, whole life insurance has a cash value component and a guaranteed death benefit. Your premiums stay the same, so you’ll know exactly how much you’ll pay each month.
  • Universal life. Like IULs, universal life insurance offers flexible premiums and death benefits, and becomes a cash asset over time. But the cash value portion of your policy earns a fixed rate, and isn’t tied to an index.
  • Variable life. With these policies, you’re allowed to invest the cash value into the market. This means your money is subject to the ups and downs of the market. If you opt in to variable life insurance, your insurer will give you a portfolio of stocks, bonds and mutual funds to choose from.

Bottom line

IULs are best for wealthy individuals who want to take advantage of stock market returns while building up a tax-free retirement. While there is a potential for big gains, these policies are expensive and complex, and insurers cap your returns.

Before committing to any kind of coverage, be sure to compare life insurance providers.

More guides on Finder

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site