Indexed Universal Life Insurance Pros and Cons

Indexed universal life insurance

Purpose of Life insurance is to protect your loved ones after your sudden death. It is to secure the future of your dependents from any cash crisis. 

Investment aims to multiply your money many times. Thereby, both are separate domains for different purposes. However, if you combine insurance and investment; you get three different types of life insurance policies:

IUL Indexed Universal Life insurance

How Much Does Life Isurance Cost?



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VUL Variable Universal Life insurance

Variable Insurance

The least risky type of life insurance from the 3 mentioned above is the IUL indexed universal life insurance. However, any and every other type of life insurance without an investment component, is 100% safer and more stable than these 3. Insurance is a substitute for stability, whereas investment is openness to risk.

  1. What is an indexed universal life insurance policy?
  2. How does indexed universal life insurance work?
  3. How does the money accumulate in cash value with IUL?
  4. Does IUL offer flexible premiums and death benefit payout?
  5. Is IUL cash value money tax-free?
  6. How much does indexed universal life cost?
  7. Advantages of Indexed Universal Life Insurance
  8. Disadvantage of Indexed Universal Life Insurance 
  9. Pros and cons of Indexed Universal Life Insurance Policy
  10.  Indexed Universal Life Insurance vs Other life insurance Policies
  11. Is indexed universal life insurance policy right for you?

What is an indexed universal life insurance policy?

Index universal life insurance policy is a type of permanent life insurance policy. It offers its perks in a certain manner. For any permanent life insurance, we know there is a cash value account; you can access during your lifetime for urgent emergencies.

There are following types of permanent life insurances:

  • Universal Life.
  • Whole Life.
  • Variable Life.
  • IUL Indexed Universal Life insurance.
  • VUL Variable Universal Life insurance.

All have a cash value component, the heavy premiums that you pay monthly for the permanent policy are split three ways:

  • Part funds the death benefit.
  • Part funds the cash value.
  • Part funds the insurance agency costs.

The cash value component builds steadily on the heavy fixed premiums every month for universal life and whole life. But for variable life, IUL and VUL, the cash value account grows based on your investments.

Where the policyholder has control over the money accumulated in his cash value account over time. And the money from cash value is invested in stocks, mutual funds, indices, equity or any other investment tool of your choice.

How does indexed universal life insurance work?

In particular, IUL is the safest from Variable life and VUL. The other two directly invest the cash value money into stock markets without any floors or caps. So either all is won, or all is lost, sort of philosophy. But with indexed universal life; the risk is limited.

Firstly, only a certain percentage of the cash value is dedicated to investment. The investment is done only in the S & P 500 index. The profits are under cap and losses are minimized by floor. However, some portion of the cash value account is still dedicated to steady build up from premiums with interest, free of any investment.

This way there is a bit of stability that some amount of death benefit will go to the beneficiaries after your death. Let’s try to grab the concept of floors, cap and participation rate in detail in the next section.

How does the money accumulate in cash value with IUL?


In case of any huge index drop; the losses can be big. But to minimize the impact, your IUL cash value invested in the index market is minimized. The floor is generally kept at 0% to 1%. It is decided by the policyholder and insurance agency at the signing of a life insurance contract. It stays the same forever.


Limited caps are applicable on the invested cash value to ensure that a part of your profit is given to the life insurance firm to keep up its costs. Usually, the caps are by 10%.  If the index goes up by 12%, your profit will stay 10%.

Participation Rates

The investment percentage of the money from your cash value is also decided at the start of the contract. If you have a 4% cap specified on your investment in the index, and your participation rate is 50%. And the index shows an upward trend in the market of $10,000 profit; you will get $200 on it due to your caps and participation rate. (participation Rate 50% of $10,000 profit X 4% Cap= $200)

The value of the floor stays constant but you can change your cap and participation rate.

Does IUL offer flexible premiums and death benefit payout?

Indexed universal life offers flexible premiums and death benefit payout. Consequently,  you can lower the premiums in harder times and make them higher when you get job promotions or bonuses. However, the costs for IUL are way higher than whole life or universal life. The investment fees, administrative fees, and after consistent downward index trend; you have to pay premiums out of the blue to save policy from lapsing.


Is IUL cash value money tax-free?

Any amount that is accumulated from the premiums and is not dedicated for investment is tax-free. But the money you make from profitable investment is taxable.

How much does indexed universal life cost?

It is less costly than VUL or variable life insurance, but more expensive than universal life or whole life. The indexed universal life insurance policy comes with untimely emergency premiums to save policy from lapsing, with administrative costs, with sales fees and commissions, with surrender charges and many let downs. Obviously, it has its perks too but keep your investment separate from your life insurance.

For investment, it is much better to directly invest in many investment tools instead of using the life insurance channel. So, it defies the whole purpose of stability for family members.