Indexed Universal Life Insurance: Pros & Cons (Companies + Rates)

As a whole life insurance product, indexed universal life insurance or IUL offers both life insurance and an investment tool and is now looked at as an additional piece in one’s overall financial plan. What makes an IUL attractive is the ability to invest in the performance of the market without actually investing in the market.

In this article, we’ll lay out the indexed universal life insurance pros and cons so you can see the differences between an IUL and other life insurance policies. We’ll also answer the question: How much does whole life insurance cost? — including Indexed Universal Life Insurance.

We’ll also show how an IUL can help you build a greater cash value that you can access whenever you need and is tax-deferred, whether now or later as retirement income. How does an indexed universal life policy work? We’ve got you covered.

Use our FREE quote comparison tool to find the best indexed universal life insurance rates.

Indexed Universal Life Insurance Companies

Searching for information on life insurance can be confusing and time-consuming, especially when you’re trying to understand the different types like indexed universal life insurance. Reddit, however, isn’t a reliable source — that’s why we’re here as your trusted guide, giving you all the information you need and when you’re ready, a place to compare rates, too.

Now, let’s get straight to the first question on your mind: How much does an indexed universal life insurance cost? While your specific rate will depend on several factors, including age, gender, high-risk habits and occupations, and veteran or active military status, you can use things like average monthly rates as a basis for comparison.

You might start your research with the top 10 life insurance companies with the highest market share.

Top 10 Life Insurance Providers by Market Share

Not all life insurance companies will offer indexed universal life insurance. However, you’ll find there are many providers that do. Here is a list a few of the top companies.

Indexed Universal Life Insurance Companies

As you can see, the above table lists insurance providers with specific ways their policies address different insurance needs.

Indexed Universal Life Insurance Quotes

To get an idea of what you can expect to pay for an IUL, take a look at the sample average annual rates offered by life insurance companies.

Average Annual Life Insurance Rates by Marital Status, Age, Gender, and Tobacco Use

But don’t stop there. Average sample rates are just the beginning. Using an indexed universal life insurance calculator, in addition to your research will help you find the right insurance provider that will fit your personal financial goals. Now, let’s talk about what is an indexed universal life insurance policy.

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Indexed Universal Life Insurance Definition

Indexed universal life insurance (IUL) is life insurance that offers flexibility with your premium payments while allowing you to invest in an equity index account without the risk of losing money in a volatile market.

A portion of the premium payment pays for annual renewable term life insurance, while the remainder pays for any additional fees, leaving the rest to be added to the cash value.

The cash value accumulates tax-deferred toward retirement. An IUL gives its owner the comfort of providing beneficiaries a death benefit but is also a good addition to those that need to diversify their financial plans as well.

Let’s take a look at the key features of an IUL.

Key Features

• No fixed interest rate – Your rate is based on the market index and how well the market performs.
• Interest rate guarantee – There are caps and floors with an IUL, so if the market takes a downturn, you won’t lose money as the interest rate won’t go below zero percent. You would only make what you invested at that time. However, if the market has a high gain, most insurance companies will put a cap on the gain, limiting the amount of money your investment can make.
• Adjustable premium payments (within limits) – The policy owner can pay their monthly premium payments with a certain portion paid toward the term life insurance and the remainder added to the cash value. They can also have their premiums paid out of their cash value account as long as there’s money to cover it.
• Adjustable death benefit – Because the policy owner controls the risk amount of their investment, they can adjust the death benefit payout as needed based on their degree of risk choice and personal budget needs at any given point in their life.
• Access to cash value – With most retirement plans, one must wait until they are 59 1/2 to access their money, but with an IUL you can access your cash value at any time as there is no minimum age requirement.

The video below will help you understand index universal life insurance a little better.

Now let’s move on to how this type of insurance works.

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How does an indexed universal life policy work?

Indexed universal life insurance fees allow policy owners to use funds through subaccounts and participate in the market, typically S&P and NASDAQ, without the danger of the market’s downside when it happens. However, with indexed universal life, Dave Ramsey cautions there is a catch about the cash value: “The rate will always be a little lower than the performance of the index because the insurance company will take their hefty share.”

The policy owner can participate in the investment portion of an IUL through two different accounts:

• Indexed subaccounts – These are a series of investments similar to mutual funds and stocks that generate growth based on the performance of the market index, so the interest rate fluctuates. However, you don’t risk losing if the market falls. It allows you to grow your cash value more aggressively.
• Fixed account – This type of account is less risky because the cash value growth is tied to a fixed interest rate so you aren’t subject to market fluctuations. Your cash value accumulates at a stable growth over time.

As an investor, an IUL gives you the control to invest in the market without the risk and pitfalls of a market loss that you would experience if investing directly in the market.

Also, if you’ve used all your other options to save for retirement and need an additional way to diversify your portfolio, an IUL is very helpful. You can contribute without restrictions and access the money at any time without a tax penalty.

Who should buy indexed universal life insurance?

Indexed universal life insurance affords the policy owner insurance for their family as well as an investment opportunity without the direct risk of investing in the market. Although it may not be the best fit for everyone, several groups may benefit from this type of policy.

• Those leaving money to their children or grandchildren. With an IUL, you can pass the death benefit to your beneficiary or beneficiaries tax-free and avoid the hassles of probate.
• Looking for insurance coverage and investment growth combined. An IUL gives you the ability to protect your family with a death benefit when you pass as well as an investment tool toward retirement.
• Life expectancy, especially for women, is increasing, so there is a need for more money later in life. Women are living longer, even longer than men, so they need to make sure they have a financial plan in place for retirement. An IUL is another option to grow cash value that can be accessed later as retirement income or at any time, if needed, for emergency funds.
• Aging or near retirement/supplementing retirement income. Most retirement plans require you to wait until you’re 59 and a half to access the income from these investments. However, with an IUL, there is no age restriction, so you can access the funds whenever you’re ready or if you need to at an earlier point in your life. Also, if you’ve maxed out other retirement plans, an IUL lets you contribute without restriction so you can more aggressively grow your cash value.

Let’s delve a little deeper into these groups.

Inheritance/Legacy

An indexed universal life insurance policy provides you with many features such as a no-lapse guarantee, death benefit guarantee, and riders to personalize your policy. When using your IUL as an inheritance as well as an investment tool, you can leave your beneficiary a death benefit without the worry of probate or a tax penalty.

Through a child rider, each child is given a term life insurance policy and then at age 21, they can convert that term insurance to whole life insurance without the need for a medical exam to prove good health.

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Retirement Planning

Indexed universal life insurance is helpful with retirement planning in many ways. An IUL policy allows you to create a compensation package for use as retirement income using cash value life insurance that grows tax-free over time. They are funded with post-tax dollars allowing policyholders to withdraw money at any age tax-free. It also provides valuable life insurance coverage with a death benefit that can be distributed simultaneously at the time of the policyholder’s death.

Money that’s invested in an IUL simulates that of an index such as the S&P 500 without suffering major market losses, yet receiving the market gains that will further their cash value.

Using IULs as a retirement planning tool provides more flexibility as you aren’t limited to how much money you can add annually unlike IRAs and 401(k)s. Lastly, you have access to your cash value when you need it and there are no restrictions like with an IRA.

You can use IULs to benefit policy owner with tax-free strategies. During the accumulation and growth phase of an IUL’s policy’s cash value, there are no taxes due. So, if you’ve wondered if indexed universal life insurance is tax-free, it can be with the right strategy. IUL policies also allow for tax-free exchanges of one policy for another without the worry of income taxes.

There is also the advantage of a tax-free death benefit for loved ones once you pass.

With concern and worry over rising taxes and market instability, an IUL gives people an alternative way to protect their savings from exorbitant taxes while providing supplemental retirement income over a person’s lifetime.

You, as the policy owner, have complete control of your retirement savings and insurance policy.

Buying an indexed universal life insurance for retirement planning is a good idea for several reasons:

• Need for life insurance and living benefits – IULs offer a lump sum death benefit payout in the event of your death, but an IUL will also pay you as policyholder directly if you suffer a critical, chronic, or terminal illness. So if you have a stroke, cancer, or an accident, you can access your living benefits to assist with medical expenses related to these medical conditions.
• Tax-free death benefit – The tax-free death benefit from an IUL passes on the assets held in the IUL tax-free giving beneficiaries immediate access to funds.
• Steady income at retirement – an IUL allows for unlimited investing creating income to be used now or well into retirement. You only pay taxes on the principal and can later withdraw funds tax-free through policy loans. Policy loans allow the policyholder to access funds without it being viewed as income because you’re paying it back.
• Likeliness to change jobs – Unlike 401(k)s, IULs stay with you forever. If you change jobs or move, your IUL moves with you no matter the situation. With 401(k)s, if you change employment, you must rollover into a new plan creating fees, commissions, and extra work for you.

As you can see, an indexed universal life insurance plan can be incredibly beneficial in helping you plan for retirement.

Indexed Universal Life Insurance vs Other Retirement Options

The majority of people aren’t planning for their retirement. As our population ages, individuals are working well into retirement age due to over 100 million working-age individuals (59.3 percent) not owning or investing in any retirement accounts, whether in an employer-sponsored 401(k) type plan or an IRA.

To live comfortably in retirement and maintain one’s current standard of living, individuals will need approximately 70 to 90 percent of their pre-retirement income, according to CNN Money.

Planning for retirement early is crucial to make sure you can live comfortably once you reach the age in which you’re ready to finally retire and relax.

Indexed Universal Life Insurance vs 401(k)

A 401(k) plan is a company-sponsored retirement account that employees can contribute to through a portion of their paycheck each month. Some employers may also make matching contributions up to a certain percentage, increasing this investment account. It’s wise to, if financially possible, contribute as much as possible — especially if your employer is matching your contribution.

There are two types of 401(k)s:

• Traditional – employee contributions reduce their income taxes for the year they are made but withdrawals are taxed.
• Roth – employees make contributions with post-tax income but can make withdrawals tax free.

One of the most important things when considering index universal life insurance vs 401k is that the IUL is an insurance policy with an investment component, while the 401k is a straight investment product. The goal of both is to grow your net worth, but IULs give you that opportunity with the advantage of access to the money without being taxed and insurance protection for your family.

However, IULs are difficult to understand because they are insurance policies first, so they come with many options and lots of fine print. This makes you have to rely heavily on an insurance agent instead of being able to control your investments and insurability yourself.

Although 401(k)s may seem somewhat difficult at first, they are easier than IULs to understand and are more straightforward. They’re also easier to navigate and start.

IULs and 401(k)s are taxed differently because IULs are already taxed. Their cash value can be accessed at any time, as long as there is enough money to cover premiums, unlike 401(k)s where you have to be 59 and a half before withdrawing any money.

When it comes to estate planning, IULs are simpler to pass to your beneficiaries because of the life insurance tax-free death benefit. Remember, IULs are an insurance policy first with an investment tool included. A 401(k) is subject to probate upon your death and is more difficult to pass to beneficiaries.

The following video helps outline the difference between a 401(k) plan and index universal life insurance.

Next, let’s discuss indexed universal life policies compared to IRAs.

Indexed Universal Life Insurance vs IRA

A Roth IRA is ideal if you expect your tax rate to be higher during retirement than it is when you’re younger and starting your investment. It’s best for the younger generation and those in a lower income bracket that can allow for decades of tax-free growth.

With no minimum required contributions, investors have complete control based on their finances and personal goals. However, contributions per year are restricted by the IRS, so substantial growth is limited compared to what can be accumulated in an IUL. All money that’s contributed to a Roth IRA grows tax-free.

What you should keep in mind is that with a Roth IRA, you really can’t access your funds until retirement, and if you do decide to withdraw money early, it will be at a hefty tax penalty. A Roth IRA is set up for long-term retirement planning.

With an IUL, you’re tied to a market index. It can accumulate substantial cash growth at a faster rate with an ability to access the cash value earlier if needed without the tax penalty. However, there are more costs involved with this type of investment tool because it’s also an insurance policy that requires monthly premium payments.

There is one exception with a Roth IRA, however. Should you come upon a life situation where you need to withdraw money, you can withdraw your contributions, but not your earnings, without experiencing a tax penalty. It’s best not to start this cycle of withdrawing from your IRA, but knowing you have this option should you need it in an emergency is comforting.

Indexed Universal Life Insurance vs IRA vs 401(k)

Either an indexed universal life policy, a 401(k), or an IRA could work for you depending on your needs.

Indexed Universal Life Insurance & Financial Goals

With only 40 percent of workers participating in employer-sponsored retirement plans, according to the National Institute on Retirement Security, it’s vitally important to start preparing for your retirement in other ways. An IUL can help you do just that.

Through the insurance side of an IUL, you can properly provide a source of income for your beneficiaries through the tax-free death benefit.

Along with the family protection, you have a way to grow money inside a life insurance policy through cash value, which is any money over the policy’s fees, expenses, and costs.

This is a smart option for your financial goals.

An IUL gives the policyholder control over how the funds are invested because the rate is assigned based on market performance without the risk of loss if the market takes a downturn.

How can an IUL be beneficial to your financial goals? Your funds grown in an IUL can later be withdrawn, taken out as a loan, used as collateral, or help cover the costs of maintaining your insurance coverage if you find yourself unable to do so.

IULs are also helpful to later create an income stream during retirement, pay for your children’s college education or grandchildren, or create an emergency fund for the unexpected.

The following video will explain about a tax-free retirement.

Next, we’ll discuss if indexed universal life insurance is a worthy investment.

Is indexed universal life insurance a good investment?

So, is indexed universal life insurance worth it? The truth is, it depends. But here are some things to consider in your decision.

What an IUL does is allow the policyholder to “overfund” their plan, so the money above fees, expenses, and costs of the policy, or the premium, goes into the account and earns interest based on the index they’ve chosen without risk of losing money due to market downturn and fluctuations.

Some may say an IUL is a risky investment, but in reality, there is a floor of 1 percent so if the market has a major loss you still get a 1 percent return on your investment. However, there is a cap of about 14 percent, so if the market goes up by 20 percent your policy only receives a 14 percent gain.

The potential gain is limited somewhat, but many feel that risk is worth the floor of 1 percent and never losing if the market drops tremendously, along with the ability to take distributions whenever and tax-free.

Opening an IUL is another way to diversify your investment portfolio and set yourself up for positive retirement planning.

While there are advantages to having an IUL, many feel there are definite disadvantages to using an IUL as an investment tool.

There is the earnings cap that many companies place on what you can earn compared to the actual market earnings.

There are participation rates since your money isn’t directly invested in the market, so you would only keep 70 to 80 percent of the gain on your investment. The participation rate is what protects you from any market loss.

As you age, there are possible mortality and insurance expenses that can increase as you get older. These expenses are based on the death benefit, so make sure you pay attention to these expenses and set them up correctly in the beginning so they don’t negatively impact you later in life.

Alternatives to Indexed Universal Life Insurance

There may come a time where certain features of an IUL are appealing but you don’t need or want an all-encompassing IUL. For those people, there are other options and alternatives available.

• Current-Assumption Whole Life (CAWL) – Also known as interest-sensitive whole life, it can be compared to an IUL but doesn’t offer the owner the flexibility or adjustability to change or amend premium payments or death benefits or the equity-indexed interest crediting rate. However, a CAWL does use current interest rates to determine cash value additions similar to an IUL.
• Adjustable Life (AL) – Adjustable life is just that, an adjustable life insurance policy that allows you the ability to alter the plan, face value, and premium payments. However, with this policy, you do have a fixed premium so you don’t have to worry about premium increases.
• Flexible Premium Deferred Index Annuity (FDIA) combined with term insurance – This type of term insurance can generate cash value accumulations and death benefit levels with a flexible premium component. However, there is a less favorable tax treatment for withdrawals and loans, unlike what you find with an IUL.
• Section 1035 exchanges – This exchange under the IRS code allows for certain types of policies to be exchanged for another without adverse tax penalty. You may not receive the flexibility of an IUL, but it does allow you the ability to change policies if one no longer suits your needs.

Think carefully about which options best suit your needs.

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Living Benefits With Indexed Universal Life Insurance

The addition of living benefits to your policy rounds out the safety net of an IUL policy. This is a very important piece that brings comfort to the family if a difficult situation arises while you’re still living.

Living benefits, also called accelerated death benefits, are riders that can be added to your policy that provide benefits to you before you pass away should you need them. These riders can accelerate a portion or all of your death benefit while you’re still living to cover a serious medical condition and the associated medical costs.

Living benefits are a great alternative to a separate long-term care, seniors life insurance policy, which is more cost-effective when watching your budget. Accelerated death benefits are an important addition so that if an unfortunate event does occur, you have options for immediate access to cash to offset medical expenses.

Keep reading to learn about the common uses of living benefit riders.

Terminal Illness

Living benefits are often needed when the insured has been diagnosed terminally ill with only 12 to 24 months to live. An example of this would be if you receive a cancer diagnosis or a terminal health condition from which recovery isn’t possible.

Chronic Illness

If the insured is diagnosed with a chronic illness, he or she is no longer able to perform or complete the minimal activities of daily living. Such cases could include individuals living with severe arthritis, diabetes, heart disease, or limiting back pain that would keep them from activities like bathing, eating, getting dressed, moving, and toileting.

Critical Illness

A critical illness includes many different health conditions. When this happens, the insurance company pays out the living benefit based on the severity or stage of the condition — think heart attack, cancer, stroke, or kidney failure. The further you are in the critical illness, stage 2 versus stage 3, the higher the lump sum payout will be.

Critical Injury

This benefit isn’t offered by all insurance companies under living benefits, so be sure to check with your individual carrier. This benefit would include, though, severe burns, traumatic brain injury, paralysis, or coma.

Now that we’ve covered common uses for riders, let’s look more closely at what they are.

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Indexed Universal Life Insurance Riders

What are life insurance riders? Riders provide different types of insurance protection. A rider is an additional benefit that can be added to a basic insurance policy that allows you to personalize your policy to fit your specific needs.

Some riders can be added at no additional charge, but most are added at a nominal fee with little underwriting.

Indexed Universal Life Insurance Riders

If you’re looking for riders, there are many options, so discuss with your insurance provider what might be best for you.

Indexed Universal Life Insurance vs Other Permanent Policies

Many executives and financial planners are looking more and more at IULs as good investment tools because of your ability to grow cash value based on a market index but being protected from drops in the market when they happen.

That, in conjunction with a life insurance policy that has a death benefit guarantee, is a win in many people’s eyes.

IUL vs Whole Life

Whole life, or permanent life insurance, is considered the safest life insurance when looking to protect your family after your death. With whole life, you get guaranteed death benefits, a fixed premium that doesn’t increase with age, and you can borrow against cash value later in life.

Whole life gives an option to pay up to face value at different time intervals of 10 years, 20 years, or at age 65.

Whole life insurance is created to be just that, a reliable life insurance plan with a cash component, but it’s not viewed as an investment tool. An IUL is an insurance that is also a retirement-income vehicle.

IUL vs Guaranteed Universal Life

Universal life insurance has its owner pay the monthly fee in two parts, one toward life insurance and the other toward savings or investment. So, while some may wonder why is universal life insurance bad? The truth is because a universal life policy gives you flexibility with the premium amount you pay within limits, it allows you more control over growing your cash value.

A guaranteed universal life policy (GUL), is like an IUL. However, your premiums stay the same no matter what the market performance is because the interest rate is set at the beginning of policy purchase. Another benefit with a GUL is their no-lapse guarantee, so as long as you pay your premium you’re covered for life.

This isn’t a policy, however, that’s going to build large cash value over time as it’s not built that way and does not react to market performance.

IUL vs Variable Universal Life

A variable universal life insurance policy lets you invest the cash value portion into a mutual fund. What’s good about a mutual fund is it’s a pool of money that is managed by investment pros and your cash value money will be invested into a lot of different companies at once, allowing you to diversify your investment.

However, there are fees associated with this type of policy. Weigh that against the purpose of the policy — life insurance for your loved ones — and those fees may cut into what is left to your beneficiaries.

What are the pros and cons of indexed universal life insurance?

Finding the right policy that fits your personal financial plan and budget is important so use this quick list of pros and cons to get you started.

Indexed Universal Life Insurance Pros

• Cash value growth is tax-deferred.
• Premiums for IULs can be lower than other universal life insurance policies.
• There is no contribution limit, which makes it attractive because of its tax-deferred growth.
• There is a lower risk because you’re investing based on a market index but without losing money if the market has a downturn.

You’ll want to weigh these benefits with the disadvantages to gauge if an IUL is right for you.

Indexed Universal Life Insurance Cons

• IULs are difficult to understand and navigate without the help of an insurance agent.
• The insurer keeps a portion of any gains the policy owner makes, so returns seen will always be less than the market index.
• Fees and costs of an IUL can be expensive compared to other investment alternatives.

Purchasing life insurance can be complicated, so make sure to learn all you need to know to make an informed decision.

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Indexed Universal Life Insurance: The Bottom Line

When looking for other ways to diversify your financial portfolio but also protect your family in the event of your death, take a look at indexed universal life insurance. With an IUL, you have the opportunity to grow a cash value account based on the market index in a less risky environment in preparation for your retirement; however, access those funds at any time without tax penalty.

Why wait? Start comparison shopping index universal life insurance policies today using our FREE online tool. Enter your ZIP code below to get started.

References:

1. https://www.nirsonline.org/wp-content/uploads/2018/09/FINAL-Report-.pdf
2. https://www.irs.gov/retirement-plans/401k-plans

Case Studies: How Indexed Universal Life Insurance Utilizes Different Types of Insurance

Case Study 1: Inheritance/Legacy Planning

Client Profile: John is a successful business owner in his 50s and wants to ensure that he leaves a financial legacy for his children and grandchildren. He wants to protect his family’s future while also diversifying his investment portfolio.

Solution: John decides to purchase an indexed universal life insurance (IUL) policy. By adding a child rider to his policy, each of his children is provided with a term life insurance policy. When they reach the age of 21, they can convert the term insurance to whole life insurance without a medical exam, ensuring continued coverage.

This strategy allows John to leave a tax-free death benefit for his beneficiaries while also providing an investment tool to accumulate cash value over time.

Case Study 2: Retirement Planning

Client Profile: Sarah is a 45-year-old professional who wants to secure her retirement and create a source of tax-free income. She is looking for an investment option that can provide both protection and growth potential.

Solution: Sarah decides to explore indexed universal life insurance as a retirement planning tool. She opens an IUL policy and starts contributing with post-tax dollars. The cash value of her policy grows tax-deferred over time. When she reaches retirement age, Sarah can access the accumulated cash value without any tax penalties.

The death benefit of the policy also provides valuable coverage for her loved ones. By using an IUL, Sarah has more flexibility in contribution amounts compared to traditional retirement options like IRAs and 401(k)s.

Case Study 3: Estate Planning

Client Profile: Mark and Lisa are a married couple in their 60s who want to protect their savings from rising taxes and market instability. They are looking for an alternative way to safeguard their assets and provide supplemental retirement income.

Solution: Mark and Lisa decide to purchase an indexed universal life insurance policy as part of their estate planning. They use the IUL as a way to protect their savings from exorbitant taxes. The cash value of the policy grows over time, and they have the option to withdraw funds whenever needed without any tax penalties.

Additionally, the tax-free death benefit ensures that their loved ones will receive a financial legacy. Mark and Lisa have complete control over their retirement savings and insurance policy, giving them peace of mind for their financial future.

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