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IULs: A Polarizing Product

IULs, or rather their proponents, make a lot of claims. Depending on who you ask, an IUL is either the best financial tool ever and solves your every monetary woe from savings to taxes or its a scam designed to swindle poor unsuspecting Americans out of their hard earned money for an outsized commission. It seems no one is neutral on this polarizing product. I aim to be a voice of reason on this topic and cover the concept from a more utilitarian point of view, not exhaustively, but covering the major points of concern.

The Pros:

  1. Tax Efficiency: One of the most alluring features of IULs is their tax-free growth, offering policyholders an account shielded from future tax obligations similar to a Roth account, but covered under tax code 7702 instead of 408. With an IUL none of your contributions are tax deductible, but your distributions can be taken as loans against the accrued cash value, and this method is not taxable, giving you a tax free stream of supplementary income. The cash value can also be added to the death benefit giving you a way to pass your lifetime's worth of wealth onto the next generation tax free without a trust or complications from probate.

  2. Market-Linked Growth: IUL policies link their cash value growth to market indexes, presenting a structured approach to participating in market upturns while mitigating exposure to downturns. With a 0% floor, which is common, even in a down year the cash value will not decrease as long as you are at least paying for the cost of insurance. You plateau as others take a loss in down years, and are able to participate in most if not all of the growth in up years. You effectively trade market risk for company risk, and with an insurance company, that is usually a much safer bet.

  3. Adaptability and Flexibility: All universal life policies are customizable. This adaptability stands as a noteworthy feature, providing a pragmatic response to the fluid nature of individual financial needs. Both the face amount of the policy and the monthly premium can be changed, the cash value and overpayment of premiums can be allocated and reallocated to different funds within the account. Even the loan terms can be changed to suit your needs. This does mean you need a more competent professional to set one up correctly, but it also means that when one is set up correctly, it should absolutely be the best cash value life insurance policy for you.

  4. Living Benefit Provision: Some IUL policies retain the option for policyholders to access a portion of their death benefit during their lifetime in the event of a chronic, critical or terminal illness, helping to fill additional potential insurance needs.

The Cons:

  1. Fee Structure: IULs, while offering potential for substantial market-linked gains, often incur higher fees compared to term, and even some whole, life insurance products. These fees can have a substantial impact on short-term returns, with most accounts not "breaking even" until the 10 year mark. These fees are usually flat or diminishing, becoming a smaller charge percentage-wise over the lifetime of the policy, but if short-term gains are your goal, an IUL is almost certainly not the right policy for you.

  2. Market Participation Constraints: Despite the link to market performance, IULs frequently impose caps or participation rate limits, restricting the extent to which policyholders can fully capitalize on market upswings. This controlled exposure underscores the need for a measured assessment of potential gains. While you have minimal downside risk, you may also have limited upside potential depending on what strategies are available to you and which you have allocated your funds to.

  3. Complexity: The intricate nature of IUL policies, characterized by multiple components and nuanced features, demands a meticulous understanding of policy terms, index-linked calculations, and associated riders. Complexity, while affording flexibility, necessitates a careful approach in navigating the intricacies. Many professionals who are more concerned with volume may opt not to do the necessary work in personalizing these policies for each client, so the agent you go through may be as instrumental in your policy's success as the company or brokerage is.

  4. Surrender Charges: The imposition of surrender charges for premature withdrawals or policy termination introduces a dimension of financial commitment. Policyholders should be cognizant of these charges, which may act as a deterrent to altering the terms of the policy during the first 10 years of ownership.


IULs are complicated. That can be a huge benefit, or a massive drawback. You may end up with a perfectly personalized policy which maximizes your benefits or a monster that eats away at your wealth and gives you nothing but expensive insurance. The duality of benefits and drawbacks necessitates a measured approach, guided by a comprehensive understanding of individual financial objectives. As with any financial instrument, prudence and due diligence serve as the touchstones for navigating the market of IUL policies, and the complicated nature of the policies nearly necessitates an unusually upstanding and ethical agent to walk you through the process, educate you on your policy's specific pros and cons, and ensure that your policy is build correctly and funded optimally given your unique financial situation.


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