When I work with clients who are exploring alternatives to traditional retirement planning, one question that comes up frequently is about the potential drawbacks of indexed universal life insurance. While I’ve seen the MPI strategy help many families build substantial retirement income, I believe in giving you the complete picture—including the problems you might encounter with indexed universal life insurance if it’s not properly structured or understood.
For a complete overview, see our complete guide to MPI.
Let me walk you through the real issues I’ve observed, so you can make an informed decision about whether this strategy makes sense for your situation.
The Most Common Problems With Indexed Universal Life Insurance
1. Misleading Illustrations and Unrealistic Expectations
One of the biggest problems I see with indexed universal life insurance is how it’s often presented. Many agents show illustrations with consistently high returns—sometimes 8%, 9%, or even 10% every single year—without explaining that these are hypothetical projections, not guarantees.
The reality is that index-linked crediting varies year to year. You might get 12% one year, 0% the next, and 6% the year after that. When agents don’t explain this volatility upfront, clients get shocked when they see a 0% credit in a down market year, even though their principal is protected.
I always tell my clients: “The illustrations are roadmaps, not promises. They show what’s possible based on historical averages, but your actual experience will have ups and downs.”
2. High Fees and Charges in Poorly Designed Policies
Not all indexed universal life policies are created equal. Some carriers load their policies with excessive fees that can eat away at your cash value growth:
- Administrative charges that increase annually
- Cost of insurance that rises dramatically as you age
- Surrender charges that last 15-20 years
- Premium loads that take a percentage of every payment
The key is proper policy design. When I work with clients, we focus on max-funded policies with minimum death benefits to reduce insurance costs, and we choose carriers with competitive fee structures. But if you’re not working with someone who understands these nuances, you could end up with a policy that performs poorly due to internal costs.
3. Caps and Participation Rates That Limit Upside
Here’s something many people don’t fully understand about indexed universal life insurance: you don’t get the full market return even in good years. Insurance companies use caps and participation rates to limit your upside.
For example:
- If the S&P 500 goes up 15% in a year, but your cap is 10%, you only get 10%
- If you have an 80% participation rate and the index goes up 12%, you only get 9.6%
These limitations can be frustrating, especially during strong market years. However, I remind clients that the trade-off is the 0% floor protection. You’re giving up some upside to eliminate the downside risk entirely.
4. Complex Product Structure That’s Hard to Understand
Let’s be honest—indexed universal life insurance is complicated. The interaction between index crediting, loan features, policy charges, and cash value growth creates a system that many people (including some agents) don’t fully grasp.
This complexity leads to several problems:
- Clients don’t understand how their money is actually growing
- They don’t know when or how to access their cash value efficiently
- They make decisions based on incomplete information
- They lose confidence in the strategy when they don’t understand the mechanics
In my experience, education is crucial. I spend significant time with clients explaining exactly how the 0% floor works, why policy loans don’t reduce your cash value’s earning potential, and how the participating loan feature creates the leverage that makes the MPI strategy powerful.
The “Set It and Forget It” Mentality Problem
Why IUL Requires Active Management
Unlike a 401(k) that you can basically ignore for decades, indexed universal life insurance benefits from periodic review and adjustment. Here are the issues that arise when people take a hands-off approach:
Premium Flexibility Can Backfire: IUL policies have flexible premiums, which sounds great in theory. But I’ve seen clients reduce or skip payments during tight financial periods, then wonder years later why their cash value isn’t growing as projected.
Changing Life Circumstances: Your insurance needs, income level, and financial goals change over time. A policy that made sense at 35 might need adjustments at 45 or 55.
Carrier Performance Variations: Different insurance companies perform differently over time. Caps change, participation rates shift, and fee structures can be modified within contractual limits.
The Importance of Working With the Right Agent
This brings me to what I consider the biggest problem with indexed universal life insurance: working with agents who don’t truly understand the strategy or who disappear after the sale.
I’ve had clients come to me with existing IUL policies that were poorly designed from the start, or where the original agent couldn’t explain how the policy actually worked. When you’re implementing a long-term strategy like this, you need someone who will be there for ongoing guidance and policy management.
Market Timing and Sequence of Returns Issues
Early Years Performance Matters
While the 0% floor protects your principal, the timing of market performance still matters, especially in the early years of your policy when your cash value is building.
If you experience several 0% credit years early on, while you’re still paying significant insurance costs, it can slow your cash value accumulation. This is particularly problematic if you were counting on using the participating loan feature within a specific timeframe.
I help clients understand this by explaining that IUL performs best as a long-term strategy—typically 15-20+ years. The compound cycles need time to work in your favor, and early setbacks can be overcome with patience and consistency.
The Surrender Charge Trap
Why Early Termination Can Be Costly
Indexed universal life policies typically have surrender charges that last 10-15 years. If you need to cash out your policy during this period, you’ll pay penalties that can significantly reduce your return.
This creates a problem for people who:
- Didn’t understand the long-term commitment required
- Experience financial hardship and need immediate access to their money
- Get spooked by market volatility and want to “cash out”
- Were sold the policy inappropriately for their situation
The solution? Use the policy loan feature instead of surrendering. But again, this requires understanding how the strategy actually works.
Tax Law Changes and Legislative Risk
The Rules Could Change
One concern I discuss with clients is the potential for tax law changes. The current tax treatment of life insurance—tax-deferred growth and tax-free access via policy loans—has been stable for decades, but Congress could theoretically change these rules.
While I don’t think this is likely (life insurance has strong political support), it’s a risk to be aware of. However, this risk also applies to other tax-advantaged accounts like 401(k)s and IRAs, which have already seen rule changes over the years.
When Indexed Universal Life Insurance Might Not Be Right for You
Situations Where I’d Recommend Against IUL
Based on my experience, indexed universal life insurance using the MPI strategy isn’t appropriate for everyone. I typically don’t recommend it if you:
- Need short-term liquidity: If you might need your money back within 10 years, this isn’t the right vehicle
- Can’t commit to consistent premiums: The strategy works best with regular, disciplined contributions
- Are looking for maximum growth potential: If you’re comfortable with market risk and want unlimited upside, direct market investing might be better
- Don’t have adequate emergency funds: Build your foundation first before implementing advanced strategies
- Aren’t comfortable with complexity: If you can’t or won’t learn how the strategy works, you shouldn’t use it
Making Indexed Universal Life Insurance Work Despite the Problems
How to Avoid the Pitfalls
Despite these problems, I’ve seen the MPI strategy create substantial retirement income for families who implement it correctly. Here’s how to avoid the common pitfalls:
Work with a knowledgeable agent who can explain exactly how your policy works and will be available for ongoing service.
Focus on policy design by maximizing premiums and minimizing death benefits to reduce insurance costs.
Understand the commitment required—this is a 20-40 year strategy, not a quick fix.
Don’t chase the highest illustrated returns—focus on realistic projections and strong carrier fundamentals.
Plan for volatility by understanding that some years will credit 0%, and that’s normal and expected.
Use the loan feature correctly by understanding how participating loans work and when to implement them.
- Question any illustrations showing consistent high returns of 8-10% annually, as these are hypothetical projections that don’t reflect the actual year-to-year volatility you’ll experience with indexed universal life insurance.
- Compare fee structures carefully between carriers and focus on max-funded policies with minimum death benefits to reduce insurance costs that can erode your cash value growth over time.
- Understand that caps and participation rates will limit your returns even in strong market years, but remember this trade-off protects you from losses when markets decline.
- Recognize that indexed universal life insurance is inherently complex, so work only with knowledgeable professionals who can explain both the benefits and significant limitations upfront.
- Ensure proper policy design from the start, as poorly structured policies with excessive administrative charges and long surrender periods can severely impact long-term performance.
The Bottom Line on IUL Problems
The problems with indexed universal life insurance are real, but most of them stem from poor implementation, unrealistic expectations, or working with agents who don’t truly understand the strategy.
When I sit down with families considering the MPI strategy, I’m upfront about both the benefits and the challenges. This isn’t a magic solution—it’s a sophisticated financial tool that requires education, patience, and proper execution.
The families who’ve been most successful with this strategy are those who took the time to understand it fully, committed to consistent funding, and maintained realistic expectations about the timeline and process.
If you’re considering indexed universal life insurance as part of your retirement planning, make sure you understand these potential problems before moving forward. The strategy can be powerful when implemented correctly, but it’s not right for everyone, and it’s not a decision to make lightly.
Want to explore whether the MPI strategy might make sense for your situation? I help families understand exactly how this approach works, including the potential drawbacks, so they can make informed decisions about their financial future. Reach out for a consultation and let’s discuss whether this strategy aligns with your goals and circumstances.
