When I talk to clients about indexed universal life, one of the first questions I hear is whether indexed universal life is good or bad. I understand the confusion—there’s a lot of conflicting information out there, and frankly, some of it comes from agents who don’t fully understand what they’re selling.
For a complete overview, see MPI explained in detail.
Let me share what I’ve learned after helping hundreds of families navigate this decision. The truth is, indexed universal life isn’t inherently good or bad—it’s a tool. And like any tool, its value depends entirely on how it’s used, who’s using it, and whether it’s the right fit for your specific situation.
What Is Indexed Universal Life Insurance?
Before I dive into whether indexed universal life good or bad for you, let me explain what it actually is—because I find most people have misconceptions about how it works.
Indexed Universal Life (IUL) is a type of permanent life insurance that combines a death benefit with a cash value component that can grow based on the performance of a stock market index, typically the S&P 500.
Here’s the key point that many people miss: your money never actually goes into the stock market. Instead, the insurance company keeps your premiums in their General Fund—one of the most conservative investment vehicles in existence—and uses the earnings from that fund to purchase stock market options on your behalf.
How the 0% Floor Actually Works
This is where IUL gets interesting. When the market goes up, those options pay out and you receive index credits up to a certain cap (often 10-12%). When the market goes down, those options expire worthless, but you don’t lose anything—you simply earn 0% for that year.
I like to use the “gravy vs. steak” analogy: when the market goes down and those options expire worthless, you only lost the gravy, not the steak. Your principal—the steak—never went anywhere. It was sitting safe in the General Fund the whole time.
The Good: When Indexed Universal Life Makes Sense
In my experience working with families, I’ve seen IUL work exceptionally well in certain situations. Let me walk you through when it can be a powerful tool.
Tax-Advantaged Growth and Income
One of the most compelling features of a properly designed IUL is its tax treatment. Your cash value grows tax-deferred, and when structured correctly, you can access that money through policy loans that are generally not treated as taxable income.
Compare this to a traditional 401(k): Let’s say you have $1 million saved at retirement. Using the 4% rule that most advisors recommend, that gives you $40,000 a year. After federal and state taxes, you might take home $32,000—that’s about $2,700 a month.
Now, with $1 million in a properly designed IUL using strategies like the MPI approach, you could potentially take distributions at higher rates through tax-free policy loans. That’s the difference we’re talking about.
Principal Protection in Volatile Markets
I watched my own parents get wiped out in 2008 when they had their money in real estate and the stock market. That experience showed me the value of principal protection.
With IUL’s 0% floor, you’re protected from market crashes. In 2008, while traditional investors lost 37%, IUL policyholders earned 0%—they broke even. Their principal was intact to fully participate in the recovery that followed.
Flexibility and Access
Unlike qualified retirement plans, IUL doesn’t have contribution limits, required minimum distributions, or penalties for early access. You can access your cash value at any age through policy loans without the 10% penalty that hits 401(k) withdrawals before age 59½.
Legacy Planning Benefits
The death benefit in IUL passes to beneficiaries income tax-free, and with proper planning, can even avoid estate taxes. This makes it a powerful tool for generational wealth transfer—something I find many families don’t consider until it’s too late.
The Bad: When Indexed Universal Life Doesn’t Work
Now let me be honest about when IUL can be problematic—because there are definitely situations where it’s not appropriate.
Poor Policy Design
This is the biggest issue I see in the industry. Many agents sell IUL policies that are poorly designed—often with high death benefits and low premium funding. These policies can implode due to high insurance costs eating away at the cash value.
A properly designed IUL for retirement planning should be max-funded with the minimum death benefit allowed by law. This minimizes insurance costs and maximizes cash accumulation.
Short-Term Thinking
IUL has surrender charges in the early years, typically for 10-15 years. If you need quick access to your full cash value, this isn’t the right vehicle. This is a long-term strategy that requires commitment and patience.
I tell my clients: if you can’t commit to funding this for at least 15-20 years, we should look at other options.
Lack of Understanding
Here’s something I’ve learned: if you don’t understand how your IUL works, you’re likely to make poor decisions with it. When the market has a bad year and you earn 0%, will you panic and surrender the policy? If so, you shouldn’t own one.
The strategy requires trust in the mathematics and the discipline to stick with it through market cycles.
Unrealistic Expectations
Some agents illustrate IUL policies at unrealistically high rates—9%, 10%, or even higher—to make the projections look attractive. While IUL has averaged around 7-8% historically, you should be comfortable with the policy’s performance even if it earns less.
Common Concerns and Misconceptions
“The Insurance Company Can Change the Caps”
This is true—caps and participation rates can change based on market conditions and the cost of options. However, the 0% floor is contractually guaranteed and cannot be changed. Even if caps decrease, you still have principal protection that no market investment can provide.
“The Fees Are Too High”
In a poorly designed policy, yes, the fees can be prohibitive. But in a properly structured, max-funded IUL, the internal costs are often competitive with managed investment portfolios, especially when you factor in the tax advantages.
“I Can Do Better in the Stock Market”
Maybe you can achieve higher gross returns during bull markets. But after accounting for:
- Market losses in down years
- Taxes on gains and withdrawals
- Sequence of returns risk in retirement
- The 4% safe withdrawal limitation
A properly designed IUL often produces more net spendable retirement income on the same dollars saved.
How to Determine If IUL Is Right for You
Based on my experience, IUL works best for people who:
- Have maximized other tax-advantaged options (401k match, etc.)
- Are looking for tax-free retirement income
- Want principal protection with growth potential
- Can commit to long-term funding (15+ years)
- Understand and believe in the strategy
- Are working with an agent who truly understands policy design
IUL may NOT be right if you:
- Need short-term liquidity
- Are looking for a get-rich-quick scheme
- Can’t commit to consistent funding
- Are uncomfortable with complexity
- Only want the absolute lowest cost option
- Understand that IUL isn’t inherently good or bad—it’s a financial tool that works well for some people and poorly for others depending on your specific situation and how the policy is designed.
- Know that your money never actually goes into the stock market with IUL—instead, the insurance company keeps your premiums in their conservative General Fund and purchases market options on your behalf.
- Take advantage of the 0% floor protection, which means when markets go up you earn credits up to a cap, but when markets go down you simply earn 0% rather than losing your principal.
- Consider the tax benefits of properly designed IUL, including tax-deferred growth and the ability to access money through policy loans that are generally not treated as taxable income.
- Work with a knowledgeable agent who fully understands IUL products, since the tool’s effectiveness depends heavily on proper structuring and whether it fits your financial goals and risk tolerance.
The Bottom Line on Indexed Universal Life
After helping hundreds of families with their financial planning, I can tell you that indexed universal life good or bad really depends on the specific situation, the policy design, and the person’s goals and timeline.
When properly designed and used as part of a comprehensive financial strategy, IUL can be a powerful tool for creating tax-advantaged retirement income with principal protection. But it requires the right design, the right expectations, and the right commitment.
The key is working with someone who actually understands how to structure these policies correctly and can explain the strategy in terms you can understand. Would you stop using plumbers because one guy overcharged you? Would you never buy a car again because one salesman was pushy? The life insurance industry has some bad actors, but that doesn’t mean the strategy itself is flawed. You just need to work with someone who actually understands what they’re doing.
Getting Started
If you’re considering indexed universal life as part of your financial strategy, I’d encourage you to take the time to truly understand how it works. This isn’t a decision to make quickly or based on a sales presentation.
I always walk my clients through the progression: Start with understanding term life insurance—pure protection, affordable, makes sense. Then understand how whole life adds a cash value component. Then see how Indexed Universal Life takes that further with index-linked growth. Then finally, see how max-funding that IUL and using advanced strategies can maximize the whole approach.
Related Reading
- Benefits of IUL: What You Should Know
- Retirement Income Solutions: What You Should Know
- MPI Investment: What You Should Know
- Indexed Universal Life Insurance Pros and Cons
Ready to explore whether indexed universal life could work for your situation? As an independent agent, I work with multiple top-rated carriers and can help you understand the real numbers—both the potential benefits and the actual costs involved.
Let me help you determine if this strategy makes sense for your specific goals and timeline. The consultation is free, and there’s no obligation—just an honest conversation about whether IUL could be a valuable part of your financial plan.
