Lewis & Ellis, LLC

What is indexed universal life insurance?

Life Insurance and Annuities
by Jan E. DeClue
Life insurance is valuable in many ways.
Life insurance is valuable in many ways.

Different life insurance policies were created to serve different populations and fit particular needs. Indexed universal life (IUL) insurance has many benefits for the right person and also holds several additional wealth management advantages. Let's take a look at IUL insurance basics and what demographics this kind of life insurance generally serves best. 

What indexed universal life insurance is

IUL insurance policies not only find their purpose as risk assurance, but they can also assist the policyholders in building wealth. What makes IUL different from other policies is that a portion of the premium payment goes into annual renewable-term life insurance. Term life insurance, also known as pure life insurance, guarantees death benefit payment. The rest of the value goes into the overall cash value of the policy. Keep in mind that fees must be deducted from the value, which would decrease the cash value of the IUL coverage.

So what makes IUL insurance so attractive to some wealth builders? They can add flexibility to the insurance policy and there is also a great benefit in the tax-free gains that come along with the coverage.

Who needs an indexed universal life insurance policy

An IUL policy might be the right choice for a client if they are looking for a lifelong insurance product that builds wealth over the life insurance term. This is because it offers potential for growth and also retains the most value in an unsteady market.

For those who have considerable assets or wealth in up-front investments, IUL insurance will be a great wealth management tool, especially if someone wants a tax-free retirement. We will go into the details of the benefits later, but this is a brief summary of the advantages.

How indexed universal life insurance works

IUL insurance is most often used as a cash-value insurance policy. With this kind of insurance policy, the policyholder's beneficiaries receive the death benefit, which is one of the main purposes of the coverage. However, many people choose IUL because of the cash value component. The policy increases in value over time because part of the insurance premium goes into building the value.

It also earns interest based on the stock market index, hence the name. The rate of return on the policy's cash value fluctuates with the index's movement. In comparison to other policies like variable universal life insurance, it is less risky.

Benefits of IUL insurance

Encourage clients to have a conversation with their insurance agent about the best option for their circumstances. When it comes to taking care of beneficiaries and managing wealth, here are some of the top reasons that someone may choose to pick an IUL insurance policy:

Social security

The cash value that can accrue due to the interest paid does not count toward earnings. This includes loan amounts that are borrowed against the insurance policy. This means a client can use their insurance payout instead of dipping into their social security money before they are ready to do so.


Each policy should be tailored to the client's personal needs, especially if they are managing sizable assets. The policyholder and the agent can choose the amount of risk they consider to be appropriate for their needs. They can also adjust death benefit amounts. IUL is an overall easily adjustable plan in most cases.


Due to the interest rates of universal life insurance policies, the rate of return that a client can potentially receive is higher than other insurance coverage. This is because the owner and the agent can leverage call options to increase possible returns. This can mitigate some of the risks that comes with indexing a policy.

Capital gains 

Policyholders may be attracted to an IUL policy because they do not pay capital gains on the additional cash value of the insurance policy. This can be contrasted to other policies that require taxes be paid on any money that is taken out. This means there's a cash asset that can be taken out at any time, and the life insurance policyholder would not have to worry about paying taxes on the withdrawal. Be sure to advise clients that they will still be taxed for capital gains if they abandon the policy before it matures.

Drawbacks of IUL insurance

While there are many different benefits for a policyholder to choose this kind of life insurance, it's not for everyone. It is important to let the consumer know both sides of the coin. Here are some of the most important things to encourage a client to take into consideration before opting for this choice:


There are caps on the returns a policyholder can receive. It is not the same in every case, but it can significantly reduce the amount of returns, even when a particular equity index is performing particularly well in a given market. The best option depends on the client's risk tolerance.


While the fees associated with an IUL insurance policy are worth it for some consumers, it is important to be upfront with them about the costs. There are premium expense charges and other administrative fees that can start to add up. These are not necessarily unique to these kinds of policies, but should still be taken into consideration.

No guaranteed interest rate
Some other insurance policies offer an interest rate that is guaranteed. This is not the case for IUL insurance. This is fine for some, but for others, the unknown fluctuations can leave them feeling exposed and insecure.

To learn more about dealing with indexed universal life insurance and suggesting it for particular clients, reach out to Lewis & Ellis today.



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