IULs: A Polarizing Product

A Reformed Examination of Indexed Universal Life Insurance

Introduction: The Case for Careful Evaluation

In the financial marketplace, Indexed Universal Life (IUL) insurance occupies a highly contested space. Advocates present it as a flexible, tax-advantaged tool that can address multiple objectives (protection, growth, and liquidity) in a single structure. Critics dismiss it as unnecessarily complex, expensive, and prone to underperformance when reality fails to meet optimistic illustrations.

Both extremes obscure what is most necessary for the Christian household: clear-eyed evaluation. Scripture warns against hasty decisions and urges diligence in understanding what we steward. The goal here is not to champion IUL as a one-size-fits-all solution, nor to discard it wholesale, but to examine it as one possible instrument within a broader plan; assessing its structure, benefits, vulnerabilities, and appropriate use cases.

The Mechanics of an IUL

An IUL is a form of universal life insurance that combines a flexible premium schedule with an interest-crediting method tied to a market index. The policy’s cash value is not directly invested in equities. Instead, the insurer uses options strategies to capture a portion of an index’s upside while protecting against losses through a contractual floor; a concept we will explain in greater detail with you if we find an IUL makes sense to add to your portfolio.

The main structural features include:

1. Premium Flexibility – Payments may vary within set limits, provided they cover the Cost of Insurance (COI) and policy expenses.

2. Indexed Crediting – Interest credits are based on index performance, subject to a cap, participation rate, and floor (often 0%).

3. Yearly Renewable Term Costs – The COI increases annually with age, which makes early overfunding critical.

4. Policy Loans – Cash value can be accessed via loans that, if structured properly, may be received without immediate taxation.

5. Non-MEC Funding – Funding below Modified Endowment Contract limits preserves favorable tax treatment for withdrawals and loans.

   
   

Without a firm grasp of these mechanics, it is impossible to evaluate whether an IUL belongs in a household’s long-term financial architecture.

The Promised Benefits

When structured and funded correctly, an IUL offers several features that attract interest:

• Downside Protection – A contractual floor prevents negative credits during market downturns, protecting accumulated value.

• Upside Participation – Indexed crediting allows a share in market gains, though subject to caps.

• Tax-Advantaged Liquidity – Loans can be used to access cash value without immediate tax consequences, provided the policy remains in force.

• Legacy Planning – The permanent death benefit can fund inheritance goals or charitable giving.

• No Contribution Caps – Unlike retirement accounts, contributions are limited primarily by MEC thresholds and insurer guidelines.

• Distribution Flexibility During Market Declines – In some cases, policy loans may be used in down and/or recovery years to provide income, allowing other retirement assets to remain invested rather than being sold at a loss. Some studies suggest this type of sequencing strategy can increase the sustainable withdrawal rate from retirement accounts; however, results will vary and are not guaranteed.

  
  

These features, when kept in their proper context, can complement other tools in a household’s portfolio rather than replace them.

The Real Risks and Limitations

While the marketing language focuses on potential benefits, the prudent steward must weigh the vulnerabilities:

• Rising COI Over Time – The yearly renewable term cost structure means insurance charges increase annually, creating pressure on the cash value in later years.

• Optimistic Projections – Many illustrations assume idealized crediting rates that may not materialize, especially with capped returns and variable participation rates.

• Loan Risk – Policy loans reduce available cash value. If the policy lapses with loans outstanding, the forgiven amount becomes taxable income—often at a moment of financial strain.

• Complexity – The interplay of caps, floors, participation rates, loan types, and rising costs can make oversight challenging, even for diligent households.

• Funding Discipline – Underfunding early or skipping planned contributions can cripple performance and hasten policy failure.

  
  

These limitations are not inherently disqualifying, but they demand that any household considering IUL does so with sober awareness and a willingness to monitor the policy throughout its life.

How We Address These Concerns

While the risks above are inherent to the IUL structure, there are ways to design and manage a policy that may help reduce their impact. In our practice, we address these considerations through the following approaches:

• Managing Rising COI – We encourage early and consistent funding so the policy builds sufficient cash value to help offset rising costs in later years. Funding is typically structured so that no more than one-third of a household’s discretionary income is allocated to premiums, which helps maintain affordability and reduces the likelihood of missed payments.

• Credit Strategy Selection – Where available, we consider using uncapped or higher-participation crediting strategies for a portion of the allocation, understanding that while this may provide more growth potential in favorable markets, returns are not guaranteed and results will vary.

• Loan Practices – We advise clients to take loans only when there is a clear need and to repay them promptly when possible. This approach helps preserve cash value and reduces the risk of a loan-driven lapse.

• Flexible Death Benefit Options – Many policies allow adjustments to the death benefit within the insurer’s rules. This can provide the ability to lower the minimum required premium temporarily during periods of financial strain, though any changes should be reviewed for long-term impact.

• Ongoing Oversight – We conduct regular policy reviews to assess actual performance against expectations, verify that funding is on track, and make adjustments when necessary.

  
  

These strategies are educational examples and not a guarantee of results. Effectiveness will vary depending on the policy, the issuing insurer, and the household’s ability to maintain consistent funding and oversight.

IULs within a Tax-Free Planning Framework

Stewardship is not simply about preserving what we have, but about structuring our resources to endure under future conditions. One of the most significant risks to retirement income is the potential for higher future tax rates. Structuring a retirement plan that intentionally shifts wealth into truly tax-free instruments, while those rates remain comparatively low, is an act of foresight.

IULs can play a role in that strategy when paired with other tax-free vehicles. Retirement income generally flows from three categories: taxable, tax-deferred, and tax-free. The tax-free tier is often the most constrained by law, with Roth IRAs and Roth conversions limited by contribution caps, income thresholds, and timing rules. A properly structured, non-MEC IUL can contribute to this tier without those same statutory limits, offering:

• Supplemental tax-free income in later years through policy loans.

• A death benefit that transfers outside of taxable income to heirs or charitable causes.

• Liquidity that is not bound by age-based withdrawal restrictions common to qualified plans.

  
  

However, the role of IUL in this strategy must be carefully calibrated. For most families, it is only advisable if there is more than $1,000/month in true discretionary income, with no more than one-third of that amount allocated toward IUL premiums. This one-third allocation ensures that other tax-free tools and foundational savings priorities remain funded.

This is not a rigid rule though. Some households can achieve strategic objectives with $200/month in premium, while others with larger discretionary margins may dedicate $2,000 or more. The key is proportionality, matching funding to capacity and ensuring the policy is not consuming resources needed elsewhere.

Health considerations also matter. A poor underwriting class can substantially increase COI, eroding the product’s efficiency. In such cases, insuring the healthier spouse or exploring alternative strategies may better serve the household’s stewardship goals.

When integrated into a multi-stream plan that includes Roth tools and other vehicles, a well-funded IUL can act as a stabilizing asset, smoothing income across market cycles and future tax regimes.

Appropriate Use Cases

An IUL is not a universal prescription. It has a narrow but valuable place when the household meets specific criteria:

1. Adequate Discretionary Capacity – In general, households with more than $1,000 per month in discretionary income after essential living costs, charitable giving, and other savings may have the flexibility to consider allocating a portion toward an IUL.

2. Balanced Allocation – Many households should limit IUL premiums to about one-third of their discretionary income so that other priorities, such as retirement contributions, emergency reserves, and debt repayment, remain on track.

3. Funding Below MEC Limits – Structuring premiums below the Modified Endowment Contract threshold may help preserve certain tax advantages available under current laws.

4. Long-Term Commitment – IULs are generally intended for long-term use; discontinuing funding early may negatively impact the policy’s performance.

5. Favorable Health Ratings – Premiums and costs depend on underwriting; healthier applicants may find more favorable cost structures. In some cases, insuring the healthier spouse can reduce ongoing costs.

6. Existing Foundations in Place – An IUL is typically considered after more basic needs, such as term insurance for income replacement and maintaining an emergency fund, are met.

   
   

If these conditions are not met, the household risks forcing the product into a role it is ill-suited to fulfill, turning a potentially beneficial tool into a long-term liability.

Best Practices for Implementation

For households that meet the above criteria, several practices maximize the IUL’s potential:

1. Conservative Projections – Request illustrations that assume lower-than-current caps or participation rates to see how the policy performs under less favorable conditions.

2. Front-Loading Premiums – Fund heavily within non-MEC limits during the early years to build cash value that can support the policy when costs rise later.

3. Loan Timing and Management – Delay significant loan activity until the cash value is well established; use loans strategically, not habitually.

4. Annual Reviews – Revisit the policy every year, comparing assumptions to actual performance and adjusting as needed.

5. Integration with Other Tax-Free Vehicles – Pair the IUL with Roth accounts, Roth conversions, and other strategies to diversify tax-free income sources.

6. Avoiding Overreliance – Keep the IUL in its lane; it is one tool among many, not the singular foundation of the household’s financial strategy.

   
   

Alternatives and Complements

For most families, simpler tools provide the core structure of a sound financial plan:

• Term Life Insurance – Generally offers the highest death benefit per premium dollar for temporary needs.

• Qualified Retirement Accounts – IRAs, Roth IRAs, and employer plans can provide tax advantages, subject to annual limits and rules.

• Taxable Investment Accounts – Offer flexibility and no statutory contribution limits, though investment earnings may be taxable.

• Emergency Savings – Liquid reserves can help reduce the need to access long-term assets unexpectedly.

  
  

An IUL becomes valuable when it fills a gap these tools cannot, particularly when a household has exhausted contribution limits in qualified accounts, desires a permanent death benefit, and values the policy’s combination of downside protection, upside potential, and tax-advantaged liquidity.

IX. Conclusion: A Product Demanding Discernment

Indexed Universal Life insurance is neither the miracle solution that marketing departments proclaim nor the irredeemable trap some critics describe. It is a complex, conditional tool that can either strengthen or strain the household economy depending on how, and by whom, it is used.

For the Christian steward, the measure of its worth lies not in sales illustrations but in its alignment with biblical principles of prudence, clarity, and provision for the household. When a family has the capacity, discipline, and understanding to fund it properly, an IUL can be a stabilizing element within a diversified, tax-efficient plan. When those factors are absent, it becomes a costly distraction from the work of faithful stewardship.

The calling is the same in either case: know the condition of your financial “flocks,” count the cost before you build, and ensure that every tool in the household economy, insurance included, serves both the long-term well-being of the family and the advancement of Christ’s Kingdom.