Indexed Universal Life Insurance: 2025 Definitive Guide

Indexed universal life insurance (IUL) is one of the more innovative wealth-building options available today. First and foremost, it provides a death benefit like all life insurance policies. The difference is that this one also provides a build-up of cash inside the policy. This cash is not exposed to market risk, can be accessed tax-free, and is liquid.

You can access this cash without penalties or taxes before reaching age 59.5+, unlike your 401(k). It’s an incredibly flexible asset that offers much more than typical life insurance policies.

Read on to learn the details and understand why adding this to your financial portfolio could be beneficial.

Article Overview (Click a link to jump):

• What is Indexed Universal Life Insurance?
• Why Do You Want Life Insurance as Part of Your Portfolio?
• Case Study of an IUL Compared to Other Financial Vehicles
• Is Indexed Universal Life Insurance Too Good To Be True?
• How The Cash Value Works – Technical Description
• Differences Between IUL and Other Types of Life Insurance
• Why Some Advisors Don’t Recommend Indexed Universal Life
• How does an IUL Compare to Different Non-Insurance Options?
• IUL with Living Benefits
• How to Supercharge your Indexed Universal Life Policy
• Indexed Universal Life Insurance Warnings
• 150% Strategy
• Why work with Abrams Insurance Solutions on your IUL?

What is Indexed Universal Life Insurance?

Indexed universal life (IUL) is a permanent life insurance policy with a unique cash value accumulation structure. Unlike term life insurance, which expires after a specified period, IUL insurance provides coverage for your entire lifetime. While many people appreciate the death benefit it offers, they are increasingly attracted to the potential for cash value growth.

Given the recent fluctuations in the stock market, individuals are seeking safer investment avenues for capital growth without incurring risk. Traditionally, many have turned to 401(k) plans; however, these come with market exposure, deferred tax liabilities, and access restrictions that penalize withdrawals before age 59.5. Consequently, they may not serve as the optimal retirement strategy.

To address this gap, insurance companies developed IUL, allowing tax-deferred cash growth similar to a traditional investment while minimizing the risk of loss. As a result, indexed universal life insurance has seen a surge in popularity, with sales reaching an impressive $2.4 billion in 2021.

Why Do You Want Life Insurance as Part of Your Portfolio?

Many people exploring indexed universal life (IUL) insurance policies do so as part of their retirement strategy. The cash value component of an IUL allows for tax-free policy loans, making it especially appealing for those who anticipate rising tax rates in the future. If you choose not to repay the loan, it won’t adversely affect your financial situation; instead, the outstanding amount will simply be deducted from your death benefit upon your passing.

For some, an indexed universal life policy serves as a supplemental wealth-building tool alongside more traditional investments. Unlike retirement accounts such as 401(k)s and IRAs, there are no age restrictions on taking policy loans. This unique feature positions IUL as a highly liquid wealth-building asset, enabling greater flexibility in accessing funds when needed.

Avoid Stock Market Risk

Most investors with a basic understanding of the markets know that the historical average return of the stock market hovers around 8%. However, a lesser-known fact is that individual investors typically only achieve returns of about 4%, nearly half the market’s actual returns.

A combination of factors leads to this disappointing outcome, with one of the most significant being emotional decision-making. When the market experiences a decline, many investors panic and sell their assets, missing the opportunity to benefit when prices rebound. Timing the market is notoriously challenging, often resulting in investors buying high and selling low.

As Warren Buffett wisely states, the first rule of investing is to avoid losing money, and the second rule is to never forget rule number one.

Indexed Universal Life (IUL) insurance policies protect against losses linked to stock market downturns. IULs typically have a growth floor that ranges from 0% to 2%. To illustrate, if you have $100,000 in a typical brokerage account and the market dips by 15%, your balance will shrink to $85,000. Conversely, if this amount is in the cash value of an IUL, your principal remains intact at $100,000 (minus fees) due to the protection offered by the floor.

Now, consider the following year when the same index surges by 15%. In your stock account, you would only have $97,750—nearly regaining your previous amount. However, with the IUL that didn’t incur any loss, your value would rise to $115,000. The floor on the IUL not only prevents monetary losses but also saves you the time and stress of recovering from downturns.

This graph illustrates the growth of money in an index versus the actual performance of the S&P 500 (which tracks the 500 largest publicly traded companies in the U.S.) over a 20 year period.

As you can see that both the indexed growth (represented by the blue line) and the actual S&P growth (the red line) start at $100,000. Interestingly, while the S&P experiences a down year, the indexed line remains stable, protected by the 0% floor.

When considering the difference in savings strategies, you would have accumulated an additional $131,255.98 with an IUL featuring a 12% cap and a 0% floor over the last 20 years compared to the standard S&P investment growth.

Furthermore, the earnings from the IUL are tax-deferred and can be withdrawn tax-free. The floor provides principal protection, while any gains from the S&P translate into capped earnings for the IUL. Protecting against downturns plays a crucial role in enhancing your long-term savings.

No Taxes

Most qualified plans, like a 401(k), incur income taxes when you withdraw funds from your account, and IRAs face the same tax consequences.

In contrast, an Indexed Universal Life (IUL) policy offers a tax-free death benefit for your heirs. If your estate surpasses the threshold for estate taxes, you can place your life insurance policy into a trust to mitigate these taxes.

Additionally, loans taken against your IUL are not considered taxable income by the IRS. Since you are borrowing rather than withdrawing funds, you won’t face income tax on these amounts. Moreover, because they are classified as non-taxable income, your annual IUL loan during retirement won’t elevate your tax bracket.

Distributions from your IUL are not reported on your tax return, meaning this money won’t impact your Social Security taxes or Medicare premiums.

Death Benefit

An IUL policy is a form of permanent life insurance, ensuring that you will not outlive the death benefit, unlike with term life insurance policy. In the event of an unforeseen occurrence, your IUL will provide a death benefit to your beneficiaries.

If structured properly by your agent, the death benefit increases as you contribute to the policy. Additionally, this payout is tax-free, offering exceptional peace of mind for both you and your family.

IUL Fees are Less Than Other Options

One of the most common myths surrounding Indexed Universal Life insurance is the notion that it is excessively expensive. This misconception often originates from financial advisors who may be reluctant to see their clients transition their funds into an IUL. Although it is true that IULs carry higher initial fees compared to other financial products, it is essential to consider the long-term implications.

For the first 5 to 10 years, depending on factors such as age and health, the fees associated with an IUL can indeed be higher than those of more traditional financial vehicles. However, it’s important to remember that an IUL policy can last well into your 80s, 90s, or beyond. If you are currently 40 years old, this policy could accompany you for the next 50 to 60 years, making it crucial to view the overall cost over that lifetime.

IUL fees are typically front-loaded, meaning they start at a higher rate and gradually decrease over time. After approximately a decade, IUL fees tend to become more competitive and even less than those of other financial options. When evaluating your overall financial strategy over a span of 30-40 years or longer, the total fees related to an IUL may ultimately be lower than those incurred through other investment vehicles.

Moreover, it’s vital to consult with a knowledgeable financial advisor who can provide personalized advice regarding the potential for additional fees and how they might influence your long-term financial plan.

Take a look at the case study below, where I will provide a detailed comparison of the IUL fees.

Another important consideration is the perspective that “fees only become an issue when there is a lack of value.”

Personally, I don’t mind incurring fees if the benefits I receive outweigh their cost. When evaluating the expenses associated with an Indexed Universal Life (IUL) policy, consider the comprehensive advantages it provides:

• Tax-free distributions (this alone is worth much more than the fees)
• Guaranteed protection from a stock market drop
• Life insurance tax-free death benefit
• Unstructured loans
• Indexed growth
• Creditor Protection (varies by state law)
• Living benefits

The IUL Loan Structure

The ability to take tax-free loans is one of the most appealing features of an Indexed Universal Life (IUL) policy for retirement income planning. Unfortunately, many advisors overlook how these loans function, leaving consumers uninformed.

IULs offer various loan types, but my focus here is on the Indexed or Participating loan. When you need funds from your policy, you simply contact the insurance company and specify the amount you wish to withdraw.

Remember, this is your money in your policy. You can access it wherever you want. You don’t have to apply for a loan or worry if you’re working or not. If you don’t want to pay back the loan, then the balance and interest is subtracted from your death benefit when you pass.

When you accumulate funds within your policy, it’s generally advisable to repay the loan. By doing so, you can continue to access the money in your policy time and time again. An IUL presents a fantastic way to fund significant purchases like a car, home renovation, or other major expenses.

Real-Life Example: Using an IUL to Fund a Major Purchase

When you accumulate funds within your policy, it’s generally advisable to repay any loans you take. This allows you to continue accessing the money in your policy over and over again.

For instance, I used my indexed universal life (IUL) policy to purchase a car. Instead of taking out a traditional auto loan from a bank, I borrowed from my policy. Throughout the loan period, I made regular repayments back into my policy. By the end, not only was my car fully paid off, but my policy funds were also completely restored—unlike a traditional bank loan, where I would have ended up with only a depreciated vehicle and no recovered capital.

This strategy provides a more efficient way to finance major purchases while maintaining long-term financial security.

The Benefits of Participating Loans

One of the significant benefits of a participating loan is that the amount you borrow remains invested in your policy, continually earning compound interest. The money that the insurance company loans to us comes from their general account. There is usually an interest rate to borrow this money that can range from 5% to 6%, though some companies tie their loan rates to a market index like the Moody’s corporate bond rate.

For example, if the insurance company charges 5% on your loan while your policy earns an indexed return of 10%, you’ve gained a positive arbitrage of 5%—a fantastic opportunity for wealth accumulation.

In years when your policy returns 0% interest, the 5% loan interest will be deducted from your cash value. Given the average return on these policies is between 6-9%, you will likely enjoy positive arbitrage in many years. This ensures your funds continue to grow, even during periods when you are borrowing against the policy.

By the time you reach retirement, you may have accumulated a substantial cash reserve within your policy, earning interest throughout. When you begin to withdraw retirement distributions, it’s possible you’ll earn more in interest than the amount withdrawn. This capacity for sustained income makes IULs more favorable than alternative options. For further understanding, please check the accompanying video in the case study below, which explains how it all works.

Another fantastic aspect of IUL loans is the flexibility in repayment. You can choose to pay back the loan on your own timeline, whether it takes 3 years, 5 years, or even 15 years—it’s entirely your choice.

Case Study of an IUL Compared to Other Financial Vehicles

There are numerous options available for saving money for the future. In my view, it’s crucial to choose a financial vehicle that shields your savings from market fluctuations and tax liabilities.

To illustrate this, we create Wealth Reports for our clients, comparing the benefits of saving in an Indexed Universal Life (IUL) policy against a taxable account, a tax-deferred account like a 401(k)/IRA, and a tax-free account such as a Roth IRA.

Wealth Reports contain a wealth of information, so I’ve prepared a video to walk you through it:

You can download this example wealth report as a PDF here:

IULs are incredibly versatile and can be structured to meet your individual needs. You can fully fund an IUL in as little as five payments or choose to contribute throughout your lifetime or until retirement.

Is Indexed Universal Life Insurance Too Good To Be True?

Families have used permanent life insurance to build wealth for over 100 years. It’s not just the wealth within the cash value. You can use the loans at any time for any reason. You can use it to pay for vacations or cover a financial emergency, instead of depleting your savings. If an investment opportunity presents itself, you have the liquid capital to take advantage of it. Some people even use it to fund their businesses.

A notable example comes from the Great Depression in the 1920s when JCPenney was on the brink of bankruptcy. Instead of closing his store like many others, James Penney accessed a loan from his life insurance policy, allowing him to keep operations running until profitability was restored.

Similarly, the rise of McDonald’s into the global franchise we know today is well-documented, yet few realize that a life insurance loan was instrumental in providing the initial funding to launch the brand.

Due to the tax-advantaged growth associated with this type of life insurance, it serves as an exceptional tool for accumulating liquid assets. When inspiration strikes, and you have a game-changing idea, there’s no need to seek venture capital or compete with numerous other proposals. You can utilize the funds however you wish: indulge in that dream vacation or finance your children’s college education. The insurance company doesn’t care what you do with the money, and they don’t ask.

Tax Code 7702, TEFRA, DEFRA, TAMRA

I don’t want to bore you with the details, but these are IRS Codes that explain what qualifies as life insurance and how life insurance is taxed. As life insurance policies have evolved over the years, the IRS has added these new laws.

Life insurance is an incredible tax shelter. Naturally, the IRS wants to have their say in the plan. These IRS codes set limits on the amount of cash value in the policy compared to the death benefit.

They also established rules on the abuse of life insurance and how it can become taxable. These laws also created the MEC rule and 7-pay test, which we’ll discuss below.

Is this a bad thing? No. Life insurance still has some fantastic tax benefits, but you need to play by the rules.

MEC Rule

In the 80s, using life insurance as a wealth-building vehicle was so popular that the legislature had to impose new restrictions to prevent a massive tax loophole. Now, life insurance policies must pass a 7-pay test. If they fail, the IRS considers them a Modified Endowment Contract (MEC) and are subject to taxes. A MEC is very similar to how a 401(k) or IRA is taxed.

Before the MEC rule, you could fund an entire policy with a single payment. Now you have to pay premiums over at least 5 years to maintain all of the tax benefits listed above.

This intricate rule underscores the importance of collaborating with an experienced insurance agent when it comes to designing indexed universal life policies. Such professionals must be adept at navigating the MEC classification to prevent any negative tax implications. Additionally, they should possess a solid understanding of strategies to enhance the growth of cash value, rather than merely adhering to traditional whole life or term policy structures.

How The Cash Value Works – Technical Description

The idea of never losing money on your cash value may seem too good to be true. However, the following explains the internal mechanisms that life insurance companies use to hedge risks. This ensures that you never experience a loss while also allowing them to credit your account with gains that correspond to the index it is linked to.

Hedging Example:

Let’s say you pay a $1,000 premium into your IUL policy.

• The insurance company puts $950 into high quality, investment-grade bonds. This $950 will grow back to $1,000 at the end of the year. This is how the insurance company protects the downside.
• $50 is used to purchase options. Let’s say the S&P has a 10% cap. When the S&P hits 10%, the option is exercised. This will provide the 10% upside on the index. 

A common myth I hear is that the insurance company keeps the gains over the cap. For instance if the S & P returns 15% and there is a cap of 10%, the insurance just made 5% on your money. Not true! The insurance company must exercise the hedge at the cap and does not make any money on the difference.

None of your money is ever directly invested in an index. The insurance company uses the index as a measurement for how much interest to credit to your policy.

Differences Between IUL and Other Types of Life Insurance

Indexed universal life is unique among its insurance counterparts. It has different purposes than other types of insurance, and its own set of quirks.

Term Life

Term life focuses exclusively on the death benefit. The length of the term typically matches the duration of a mortgage or the years until young children become financially independent. 

Think of term as renting insurance. It will cover you for the duration of the term, usually 10 – 40 years. Then the term ends. It does not build up cash value.

The life insurance portion of an IUL lasts for your entire life, and it builds up tax-free cash. 

Whole Life

Whole life insurance stays in place for your entire life. It still ranks #1 in terms of popularity today, despite term life being a better choice for many families. Modern whole life policies include a cash value component, paving the way for products like indexed universal life insurance.

The main difference between the two is the cash value in whole life grows through the insurer paying dividends to their policyholders. Dividends are declared annually based on the overall performance of the insurance company.

While many whole life insurance companies have a long track record of paying dividends, these dividends are not guaranteed. The interest rate declared by the dividends has been trending down for a long time. 

Both whole life and IUL last for the entire lifetime of the insured. Both have a cash value (CV) accumulation component. The main difference is the CV of an IUL is tied to an index, usually the S&P 500, whereas the CV on a whole life policy is based on less transparent dividends. 

I believe IULs have a better chance of earning a higher rate of interest than their whole counterparts. IULs also have lower expenses and are more transparent with their fees.

The other big advantage of IULs, in my opinion, is that IULs have flexible premiums. You can pay less if you need to and can catch up premiums in the future.

Universal Life

Universal life and indexed universal life are similar. They both have remarkable flexibility, allowing you to adjust the policy after you’ve taken it out as your financial situation changes. 

The biggest difference is indexed universal life grows the cash value based on an index. Universal life grows the cash value based on a declared interest rate by the insurance company.

Guaranteed Universal Life policies are great if you want a lifetime policy with a smaller premium and no cash value.

Variable Universal Life

Variable Universal Life policies are the riskiest type of permanent life insurance policy. While they may not have a cap on the growth, they also don’t have a floor. If the market goes down, your principal can go down. 

I don’t recommend VUL and feel that an IUL has the best combination of growth and protection.

Why Some Advisors Don’t Recommend Indexed Universal Life

If you google “indexed universal life insurance,” you will find strong opinions—a few in favor of, but many firmly against it. Even the financial talk show hosts have extreme views about IUL policies. 

Their advice doesn’t apply to you

Consider whether you fall into the top 25% of income earners ($84,000/year +) in this country when weighing these opinions. Most people (The bottom 75%) have an income problem, not a tax problem.

Wealth building advice for the bottom 75% typically boils down to: pay off your debts, contribute to your qualified retirement accounts up to your employer match, and don’t spend more than you earn. They do not need help minimizing their tax burden. 

General audience advice from insurance experts online and talking heads on TV, focuses on this larger audience. It’s the smart business decision for their businesses. 

The higher you climb in income, the more specialized advice you need. A CEO will need different tax minimization strategies than their employees. A doctor will need different financial advice than someone on the hospital admin team. So ask yourself, “are these people talking to me?”

Indexed universal life is misunderstood – even by many insurance agents and financial advisors

Indexed universal life has many moving parts. People don’t recommend things that they don’t understand. It’s a more complex insurance policy. However, it can provide a lot more than most insurance policies, if designed with your best interest in mind.

I have read countless articles online that are outright lies, twisted facts, or misunderstood concepts. Anyone can put up a blog post online, and many who do are professional writers. They are not knowledgeable insurance agents or financial advisors. They have no experience designing an IUL. People don’t know what they don’t know.

If you see something online that you have questions about, contact us. We will explain the truth with math, historical data, and economics to back it up.

Just by reading this article, you’ll know more than most insurance agents. If you really want to learn more, I highly encourage you to watch our video course on building tax-free wealth with life insurance. You can access it for free here:

Term insurance is easier to sell because it’s so simple. It’s in the agent’s best interest to sell the easier solution and then move on to the next sale.

Indexed universal life insurance can be an integral part of an overall financial plan. If you want a portfolio protected from risk and taxes, an IUL can be the base of that plan. We often use IUL as one asset and then will layer in some tactically managed stock strategies and/or an annuity depending on the client’s goals.

If you are interested in an overall financial plan, take a look at our Retirement Income Shortfall Analysis. We will tell you honestly if an IUL should be part of your financial plan or not. It’s not a one size fits all.

Some financial advisors and wealth managers are not allowed to sell IUL

Financial advisors often don’t recommend IUL policies because their company doesn’t allow them to use life insurance to grow their clients’ assets. They want you to keep your money in their stock and bond portfolio. 

Why? Because that advisor and company want to continue earning their 1% (or more) fee year after year. They will make more money over time by earning their annual fee rather than a life insurance commission. 

We don’t think that that is fair to clients. We are product agnostic. We don’t look at the fees we earn. We look at how best to prepare our clients for success. Life insurance, assets under management, annuities – we don’t care what we make on a product. We care about helping our clients have a successful retirement.

Are we giving up some revenue when putting money in life insurance rather than in a stock portfolio? Yes. Do we care? No.  

Our goal, plain and simple, is to help our clients best prepare for retirement. If a life insurance policy is an important asset for market and tax protection, we won’t hesitate to recommend one. 

If you absolutely don’t want a life insurance policy, no problem. We work with all financial vehicles, and our sole purpose is to work with you to best help your situation.

Whole life agents despise IUL

Many life insurance agents that industry insiders refer to as Whole-Lifers. They sell whole life insurance to everyone and won’t give an IUL a chance. Some of these are captive agents, who can only sell one company’s products. If they don’t have an IUL in their portfolio, they will do anything to convince you that their whole life is better.

Some of these agents use clever marketing tactics such as Bank on Yourself or Be Your Own Bank. These are simply marketing strategies to sell more whole life insurance. Some of them have some merit, but you can get better results with a properly structured IUL.

Whole life insurance presents a more familiar product to an agent’s potential clients. The agent doesn’t have to overcome the unfamiliarity hurdle.

Again, we are product agnostic, and we do sell whole life insurance. Whole life may be a better fit if you are older, are financially conservative, or want more guarantees. More guarantees mean more expense and less opportunity for growth in the policy.

Whole life insurance is not bad. It’s just a different policy design. 

Wondering which is best for you? We’re happy to provide an unbiased analysis of both. Then you can decide what’s best for you.

We encourage you to read both sides of the IUL argument when deciding whether it’s a good fit for your financial situation. The best thing you can do is to dig deep and understand the mechanics of any wealth-building vehicle. Then decide if it fits your current goals.

How Does an IUL Compare to Different Non-Insurance Options?

There are many different vehicles to save for retirement. The following chart highlights some of the most common options. 

Check out the first column on the left. This is a list of features that you most likely want in a plan. Then look at each option. The green boxes show that the option offers what you want. The red box means that they do not offer that feature. 

The last column on the right is the IUL. How does it compare to the other options?

Discover how an IUL compares to various qualified retirement plans in our detailed article. You’ll find projection tables illustrating how long your funds can last in retirement, along with strategies to enhance your income by integrating multiple approaches.

IUL with Living Benefits

If you make it to age 65, there’s a pretty good chance that you will live into your 80s – especially if you are married. Longer living means a health issue is more likely to appear at some point. Some indexed universal life insurance policies offer living benefits to policyholders.

Living benefits are free riders that allow you to access your death benefit if diagnosed with a qualifying illness. This is usually an acceleration of the death benefit. If your policy has a $2,000,000 death benefit, and you use $500,000 for living benefits, then your heirs will receive $1,500,000 when you pass.

The benefit is unrestricted, depending on the company, and available for any expense. Expenses might include, but are not limited to:

Household expenses	Adult Day Care
Home modifications	Regular Bills
Nursing home care	Trip around the world

Living benefits usually include the following riders:

1. Terminal Illness
2. Chronic Illness
3. Critical Illness

Terminal Illness

A terminal illness is an illness that will result in death within 12 to 24 months. The duration varies by state law.

Chronic Illness

A chronic illness is when you are unable to perform two out of six “activities of daily living” for a period of at least 90 days or are cognitively impaired.

Activities of daily living include:

Bathing	Continence	Dressing
Eating	Toileting	Transferring

According to Genworth’s Cost of Care survey, the average cost of a private room in a nursing home is $108,405 per year. Statistics show that 70% of people over age 65 will need some form of assisted care. 

If you don’t plan ahead for this, it will be a shock to your retirement income plan. Including living benefit riders or having extra accessible cash in your IUL can help you navigate this risk.

Qualified retirement plans, such as your 401(k) do not offer options like this.

Critical Illness or Critical Injury

This rider provides funds if diagnosed with one of the following illnesses (qualifying illness varies by company).

Critical illness may include:

ALS (Lou Gehrig’s disease)	Aorta Graft Surgery	Aplastic Anemia	Blindness
Cancer	Cystic Fibrosis	End Stage Renal Failure	Heart Attack
Heart Valve Replacement	Major Organ Transplant	Motor Neuron Disease	Stroke
Sudden Cardiac Arrest

Critical injury may include:

Coma	Paralysis
Severe Burns	Traumatic Brain Injury

According to the CDC, someone in the United States has a stroke every 40 seconds. That means each year, more than 795,000 people in the United States have a stroke. About 610,000 of these are first or new strokes.

We hope you never experience any of these issues. Just in case you do, living benefits can provide peace of mind and money to help you survive.

How to Supercharge Your Indexed Universal Life Policy

What if there were ways to leverage your premium payments to build your cash value larger? A couple of strategies provide additional funding to increase your death benefit and cash value – with no additional money out of your pocket. 

This is similar to how most Americans use a mortgage to buy a bigger house. You can also use financial leverage to buy a bigger life insurance policy.

Life Insurance Plus Leverage (Kaizen)

Kaizen is a strategy that leverages your life insurance premiums 3 to 1. You put in 25% of the premiums, and a bank puts in 75% of the premiums. You have to qualify with an income of $100,000+.

Kaizen works like this. You pay a premium for 5 years. A bank will match your premium for the first 5 years. Then the bank will pay all of the premiums for the next 5 years. 

The policy becomes fully funded after 10 years. Remember, you only contributed payments for 5 years. After the contributions over 10 years, we then let the cash in the policy grow for another 5 years. At year 15, the bank is paid back out of the policy’s cash value. 

You now have a paid up IUL with 60% to 100% more retirement income than you would have without Kaizen.

The policy serves as the sole collateral for the loan, so there are no personal guarantees nor loan applications to complete. Over 5 billion dollars have been financed into IULs through the Kaizen strategies since 2000. 

It’s a great way to leverage your money to get more of what you want.

Premium Financing for Life Insurance

Premium financing is another strategy using leverage for a larger IUL. This strategy is for individuals with a net worth exceeding $5,000,000. A person who needs life insurance but doesn’t have the liquid cash to pay the premiums on a large policy is a great candidate for premium financing.

These policies are often used for estate tax planning, wealth transfers, and business planning.

Initially, the borrower only needs to cover the interest payments on a loan for the first few years. Provided that your net worth and collateral meet the bank’s requirements, they will finance your life insurance premiums. Like the Kaizen plan mentioned earlier, as sufficient cash value accumulates in the policy, it can eventually be used to repay the loan, leaving you with a fully-funded IUL.

Additionally, our premium financing team has formed strategic alliances with banks that are eager to collaborate on these types of policies.

Indexed Universal Life Insurance Warnings

If indexed universal life seems like it may fit with your financial plans, there are a few pitfalls to watch. 

The two biggest issues I have seen are:

1. Agent does not design the policy properly
2. Client does not fund policy as they intended

Policy Design

When using the policy to maximize tax-free income, your agent must design the policy to be maximum-funded. Maximum funded means the death benefit is as small as possible based on the premium going into the policy.

Policy Design Example

Let’s say a healthy 40 year old male wants to put $1,000/month into an IUL until he is 65. Then he takes tax-free distributions from age 66 to 100. To maximum-fund the policy, the death benefit should start at $343,006. This will provide distributions of approximately $80,453/year (tax-free) from age 66 to 100.

Now, let’s say an uneducated agent starts the death benefit at $686,012. Using the same $1,000/month funding, the tax-free distributions are now $70,981/year from 66 to 100.

This agent just cost their client $322,048 in tax-free income if he lives to age 100. While lowering the client’s income by 12%, the agent also doubled their compensation.

We always maximum fund the IUL for our clients who want income. Sometimes a client also wants a higher death benefit. In that case, we’ll design the policy to have a higher death benefit while also maximizing income.

The reason the policy works this way is that the cost of insurance is based on the amount of death benefit. The higher the death benefit, the higher the cost of insurance. If more of the premium has to cover the insurance cost, there is less available to build up the cash value.

Unscrupulous and uneducated agents may not know these things. There is no single training for life insurance agents. There are a variety of educational programs focused around passing the agent exam. Those don’t deal with the intricacies of each policy type. It focuses on federal and state regulations. An agent without expertise in IUL may design a policy along the usual logic – max death benefit for minimal premiums. 

Client Funding

I’d like to say that every client who starts an IUL pays every premium as intended. In reality, that does not always happen. Life happens: job loss, emergencies, health issues, etc. The client intended to save $20,000/year for 20 years, but 10 years in something happens, and they cannot save.

Life insurance is just like any other financial vehicle. The more you save, the more you’ll have later in retirement. If you don’t save as much, you won’t have as much. It’s not the policy’s fault, so don’t blame the IUL. 

The good thing is that IUL’s have flexible premiums. That means if life happens and you don’t save as much, the policy won’t necessarily blow up and lapse. It means you won’t get quite as much income as you expected in the future.

In the example above, what happens if this person saves $1,000/month for 10 years, but then can only afford to save $500/month to age 65? If that happens, the tax-free income is now $62,557 instead of $80,453.

What if the same person puts in $1,000/month for 10 years, then doesn’t save any more money? The income at age 65 is then $44,503. It’s not the end of the world, and you still have some tax-free income in retirement.

As long as you have some cash built up in the policy, you can skip payments if you need to. Then play catch-up later, if you are able. This is another reason why I prefer IUL over whole life insurance. If you miss a Whole Life payment, that missed payment may become a loan against the policy. Then it will drag down the performance of the policy even more.

Caps, Participation Rates and Spreads Will Change Over Time

Every insurance company offers different index options for their IULs. The one commonality is that these policies can’t be credited with negative interest in a down year. This is the floor, which is 0%.

When the market is down 30%, and your policy only receives a 0%, this is great because you don’t have to make up that principal loss. We say, “Zero is your Hero.” 

Each index may have a cap, spread, or participation rate on the upside growth. These rates will change over time. When interest rates are down, these rates tend to be lower. When rates increase, they trend upward.

These changes are not because the insurance company is trying to make more money. It has to do with the cost of options within the hedging explained above. 

Every policy anniversary, you have the option to change the indices your IUL is invested in. If one drops, and you have a hunch that another will perform better, you can change to another option. 

Again, this isn’t a bad thing, because the floor of 0% is guaranteed. Just know that the rates will change slightly, up or down, from year to year. 

The Cost of Insurance Could Change

It is possible, though highly unlikely, that the insurance company could change the insurance cost within the policy. The insurance company can’t single you out and change your cost of insurance only. They would have to change it across the entire block of business.

Unless the insurance company has a great reason to do so, I don’t see this happening. It would have to be something crazy, like millions of policyholders from that one company all dying at once.

The other reason I don’t see this happening is that you can cash out of these policies. Nothing stops you from taking your surrender value and walking away with it. 

There is a surrender charge for the first 10 – 15 years for most companies. This is an amount of cash that you would leave behind if you walked away. However, if your agent designed the policy properly, you may have more cash in your policy than you put in, including the surrender charge, after 5 – 7 years. 

The insurance company wants to keep these policies in force for many years. This is how they earn money. If a bunch of policyholders canceled their policies, it would hurt the profitability of the insurance company. 

What If You No Longer Want the Policy or Can’t Afford the Upkeep?

As we mentioned above, you could always surrender the policy for a sum. But that’s often less than the cash value. And, if it’s early on, you might lose some of that cash to the surrender charge.

Talking to your agent about your options if you find yourself in this position will give you the best options for moving forward.

There’s also the possibility of selling your policy, particularly as you’ve built up cash value. These are called life settlements. Typically, a life insurance policy will need to have a death benefit of at least $100,000 to qualify. But it is usually a more profitable way to sell life insurance you don’t need.

Read this article to learn more about life settlements and your options for an unneeded life insurance policy.

What If the Market has a Series of Bad Years?

If the stock market is down many years in a row, that is all the more reason to have an IUL in your portfolio. This is a worst-case scenario for the first few years you hold the policy. You are paying to build the cash value and it’s sitting right around the growth floor.

However, what is the alternative? If your money is in the market, without the floor of 0%, you’ll be losing much more than just the cost of insurance. You’ll lose your principal. When you lose principal, you have to gain a lot more to get back to where you started.

The following chart shows what interest rate you need to earn to get back to even after a loss.

Starting Account Balance	Percentage Loss	Ending Account Balance After Loss	% Gain Needed to Restore Loss	Ending Balance After Gain
$1,000	-10%	$950	11.1%	$1,000
$1,000	-20%	$800	25%	$1,000
$1,000	-30%	$700	42.9%	$1,000
$1,000	-40%	$600	66.7%	$1,000
$1,000	-50%	$500	100%	$1,000

Remember that it’s better to protect your downside than take the risk of hitting a home run.

An IUL will protect your downside. So what happens if we have many bad years in a row? It’s bound to happen with the volatility of the market. If we look back at the last 20 years of the S & P, there was a period when the market was down 3 years in a row (2001-2003). 

Over the last 20 years (2000-2019), the actual return of the S&P was 4.02 percent. The return of the IUL with a floor of 0% and cap of 12% was 6.48%.

As you can see, you would have been better off with a cap and floor than getting all of the upside and downside of the market. None of us know what the future holds. What if your policy was illustrated at 6% and you earn 5% over the next 20 years? Then your income will be a little lower.

We don’t recommend having all of your eggs in one basket. Have some money in the market and some in a safe vehicle, such as an IUL. When the market is down, you’ll feel relief with the safety of your IUL bucket. If the market has a great year, your money in the market will do great, and your IUL will still do good relatively speaking.

150% Strategy

I learned a concept many years ago called the 150% rule. It’s a simple financial planning strategy. Let me show you how this works:

The percentages can be adjusted depending on your risk preference. This shows how the IUL can be utilized to protect your money in a down market. It can also grow your money in an up market.

If you want to see a complete financial plan of how an IUL and other financial vehicles can help improve your chances of a successful retirement, please reach out to us.

As we step into 2025, the landscape of Indexed Universal Life Insurance (IUL) continues to evolve, presenting new opportunities and challenges for policyholders. With recent economic fluctuations and changes in interest rates, IUL policies are being viewed more critically as a strategic financial tool. Whether you’re considering IUL for supplemental retirement income, estate planning, or legacy creation, it’s essential to stay informed about policy updates and performance trends.

Technological advancements are making IUL policies more accessible and transparent. Many providers now offer digital tools to track policy performance, simulate potential outcomes, and make informed decisions in real-time. These innovations are empowering policyholders to take a more active role in managing their life insurance strategies. If you’re considering indexed universal life insurance or already own a policy, now is an excellent time to review its benefits, evaluate your coverage, and ensure it remains a cornerstone of your financial plan in 2025.

Why Work with Abrams Insurance Solutions on Your IUL?

We practice what we preach. We believe in the strength and value of indexed universal life. Chris (Abrams Insurance owner) has owned his own IUL for 13 years. We’ve gone through the design and building process ourselves. Chris is a fiduciary, which means his client’s interests always come first and are the highest priority.

As stated before, we are product agnostic. If you want term, whole life, IUL, annuities, or tactically managed investments, we can help and are not personally swayed by which product you prefer. Our goal is to help you be better prepared for retirement – regardless of how we get you there or which products you choose.

We can hop on a screen-share and thoroughly explain any concepts and answer all of your questions. If we do end up working together, we will be there to review your IUL or other products every year. We’re not here to make a quick sale. We’re here to develop a relationship with you as a trusted advisor.

A few other resources that you can take advantage of:

• Sign up for our educational newsletter. Learn strategies and tips to help improve your retirement.
• Sign up for a free video course on how to build tax-free wealth.
• How risky is your current portfolio? Learn right now for free.
• Are you ready for retirement? We offer a free retirement analysis with no obligation. Get started now.

Not all wealth-building vehicles are right for everyone. If you have any questions or want to know if this may be right for you, give us a call today at (858) 703-6178. We’re happy to help with no obligation.

Related Articles

• Pros and Cons of Indexed Universal Life Insurance
• How to Escape the Retirement Tax Trap
• VUL vs. IUL (Which is Better for Wealth-Building?)