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The pros and cons of indexed universal life insurance (IUL)

The pros and cons of indexed universal life insurance (IUL)

April 25, 2024

Indexed Universal Life (IUL) insurance has gotten more popular in recent years due to its flexibility, tax advantages, and other potential benefits.   However, like any financial product, IUL also has some possible drawbacks to consider.

If you’re considering purchasing an indexed universal life insurance policy you need an understanding of the basics to help you make an informed decision.   IUL may not be the right choice for every individual’s financial needs.

In this article, I’ll summarize some of the pros and cons of indexed universal life insurance. If you think you might want to add an IUL policy to your retirement portfolio, be sure to consult a qualified financial professional who can help you design the best policy for your particular situation.


  1. You could create tax-free retirement income: One of the more interesting benefits of IUL plans is their potential for generating streams of tax-free retirement income. IUL policies can provide a source of guaranteed income in retirement through various income distribution options.  This feature brings peace of mind because you know that a portion of retirement income is secure regardless of market fluctuations. Even better, over time, policyholders can access funds without triggering taxable events.
  2. An IUL might provide college money: IUL policies can also serve as a kind of college savings plan, allowing policyholders to accumulate cash value to help fund their children’s education expenses. The tax-free growth and liquidity of IUL make it a smart option for saving for college tuition. .
  3. You can become your own source of financing:  When correctly structured, indexed universal life insurance offers you an opportunity to become your own bank by accessing the policy’s cash value through policy loans. You can use the cash value as collateral to borrow funds and repay them at their own pace. This strategy, sometimes referred to as “infinite banking” can potentially enhance wealth accumulation and financial independence.   Your properly designed IUL policy gives you liquidity and financial flexibility for various needs.  For instance, you could finance the down payment for a home, use the money to purchase vehicles, or for investments.  You could also access your cash for medical or family emergencies without the need to dip into your other retirement or savings accounts.  Even accounting for IUL’s fees, you could possibly save thousands of dollars in interest financing your big ticket items.
  4. You can create a legacy: The death benefit portion of an IUL policy provides financial security for loved ones by creating an instant legacy. IUL is a valuable estate planning asset, providing liquidity you can use to pay some of the final expenses and streamline the probate process.
  5. No IRS penalties when you use your money.   Unlike qualified retirement accounts such as 401(k)s or IRAs, IUL policies allow for tax-free withdrawals without the early withdrawal penalties imposed by the IRS..
  6. IUL is a Tier 1 Capital Asset: Indexed universal life insurance is considered a “Tier 1” capital asset.  Tier 1 assets are the kinds of assets in which banks and corporations keep their money.  A Tier 1 designation reflects the generally recognized stability and safety of IUL policies as a long-term financial asset.
  7. IUL gives you “living benefits.”  Unlike other types of insurance, IUL policies offer living benefits, allowing policyholders to receive financial benefits without having to wait until death.

The potential pitfalls of IUL:

  1. Indexed universal life insurance can be complicated.  Its versatility means that it has various features, components and options that may be difficult for individuals to fully understand.   Such complexity can make it challenging for you to thoroughly evaluate the suitability of an IUL policy or compare it with other financial products.
  2. There is some risk.   While IUL policies offer the potential for cash value growth linked to market indexes, they also come with risks. Policyholders may be subject to participation rates and caps that limit the upside potential of their cash value, and market downturns can result in losses despite the floor guarantees.
  3. IUL is not always sold correctly: Some critics have raised concerns about misleading sales practices associated with IUL policies. Policy illustrations often focus on non-guaranteed elements, such as cash value projections, which may not accurately reflect the policy’s performance under various scenarios.
  4. Administrative fees may be expensive: Indexed universal life insurance policies may have higher fees compared to other life insurance products, such as term life insurance or whole life insurance. Such fees can erode the cash value accumulation over time and impact the overall returns of the policy.
  5. IUL is a “hands on” product: IUL policies require active management to optimize performance and mitigate risks. Policyholders must monitor participation rates, caps, and investment options to ensure that their policy is meeting their financial objectives and risk tolerance.
  6. Flexibility is more limited than other financial vehicles: While IUL policies offer some flexibility in the form of premium payments and death benefit adjustments, there are limits to these options. As an IUL policyholder, you may face restrictions on altering the policy terms or accessing cash value under certain circumstances.
  7. The underwriting process is highly involved: Indexed universal life insurance policies often require extensive underwriting, including in-depth health evaluations and financial assessments. The underwriting process can be time-consuming and may result in higher premiums.  You could also have coverage limitations based on certain health or lifestyle factors.

Summing it up:

Indexed universal life insurance offers a range of potential benefits, including tax-free retirement income, college savings, and legacy planning. However, it’s essential for individuals to carefully consider the pros and cons of IUL policies and consult with a financial advisor to determine whether IUL is the best choice for their long-term financial goals.

Check out my short, informative videos for more information about indexed universal life insurance.

Original Post from Safe Money Trends: