Indexed universal life, or IUL, is a type of life insurance policy that provides both a death benefit and a cash value component. The funds that are within the policy’s cash value differ from those in a whole life insurance policy, or even from a regular universal life insurance policy, because the return with an IUL policy is tracked based on the performance of an underlying market index. One of the more popular index options is the S&P 500. (The policy holder may also be able to choose more than one index to track, depending on the insurance carrier and the policy).

When the underlying index performs well in a given year, then the cash value is credited with a positive return – usually up to a “cap” that is set by the insurance company. If, however, the underlying index performs poorly in a given year, the policy holder will not lose value in the account, but will simply be credited with a 0% for that period. There is also an option to place the policy’s cash value funds into a fixed account.

How IUL Works?

The way interest is credited to an IUL policy provides the potential for a higher return than that of a whole life insurance policy, or even regular universal life. For example, in years where the underlying index performs positively, your account will be credited with that return, up to a certain “cap.”

So, for example, if your policy has a cap of 7%, and the underlying index has a return of 8% in a given year, your cash value would be credited with 7%. However, in years where the underlying index performs negatively, your cash value account will simply be credited with a 0% return, therefore protecting principal – and allowing you to continue building up your cash value, without having to make up for any losses.

The funds that are inside of your cash value account are also allowed to grow on a tax-deferred basis. This means that there are no taxes due unless or until the money is withdrawn. This provides your cash value account with the ability to grow and compound over time.

Because IUL is a permanent form of life insurance, you have the benefit of knowing that your loved ones are protected financially with the income-tax free death benefit. Unlike term life insurance, IUL policies do not expire after a certain period of time. So, as long as you continue to pay the premium, this coverage will remain in force – even if an adverse health condition deems you as uninsurable in the future.

Is IUL the Right Choice for You?