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Indexed universal life insurance, commonly called IUL, is permanent life insurance with a death benefit and a cash-value account. Interest may be credited using a formula tied to an external market index. The policy’s cash value is not directly invested in that index.
How Index Crediting Works
At the end of a crediting period, the carrier applies the contract’s formula. Terms may include:
- Cap: a maximum credited rate for a strategy.
- Participation rate: the percentage of index change used in the calculation.
- Spread: an amount deducted from index performance under some strategies.
- Floor: a minimum index-crediting rate, often 0% for a specified strategy.
A 0% crediting floor does not mean the overall account cannot decline. Monthly insurance and administrative charges may still be deducted.
Guaranteed and Non-Guaranteed Values
An illustration includes assumptions. Non-guaranteed values are not predictions. Review guaranteed columns, assumed credited rates, charges, premiums, death-benefit options, and stress-test scenarios.
Flexible Premium Does Not Mean Optional Funding
Universal life may allow flexible payment timing within limits, but inadequate funding can reduce values or cause lapse as insurance costs rise. Florida’s consumer guidance warns that universal-life owners may need to increase premiums when credited interest does not offset increasing costs.
Loans and Withdrawals
Access may be available, but loans accrue interest and withdrawals or loans reduce policy values. A lapse or surrender with an outstanding gain and loan can create tax consequences.
Who Might Consider an IUL?
An IUL may be considered by someone who needs permanent insurance, accepts non-guaranteed crediting, can fund the policy consistently, and will review it regularly. It should not be selected solely from an illustrated return.
Sources and Further Reading
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