Indexed universal life (IUL) is a type of permanent life insurance that credits interest to your policy’s cash value based partly on the performance of a market index, such as the S&P 500. Importantly, your money isn’t actually invested in the stock market. The index is only used as a benchmark for calculating how much interest gets credited.

Floors and caps

Two features define most IUL policies. A floor guarantees your credited interest won’t go below a certain level (often 0%) in a year when the index performs poorly, meaning your cash value generally won’t lose value due to market downturns, though fees and cost of insurance still apply. A cap limits how much interest you can be credited even in a strong index year. There may also be a “participation rate,” which determines what percentage of the index’s gain is used in the calculation. These three levers (floor, cap, participation rate) can change over time and vary significantly between insurance companies and products.

What IUL is generally used for

People often consider IUL for lifelong death benefit protection combined with the potential for cash value growth that isn’t directly exposed to market losses. Some also use the accumulated cash value as a supplemental source of tax-advantaged retirement income later in life, generally through policy loans or withdrawals.

What to watch for

• Caps and participation rates are set by the insurer and can be adjusted, subject to any guaranteed minimums in the contract.
• Cost of insurance and administrative fees are deducted regardless of index performance.
• Illustrations show projected, not guaranteed, performance, so it’s worth asking to see both a guaranteed-minimum scenario and a more optimistic one.

IUL can be a useful tool for the right situation, but the details of a specific policy matter far more than the general concept. Reviewing an actual illustration with someone who can walk through the assumptions is the best way to know what you’re really getting.

This article is educational and general in nature. It isn’t personalized financial or legal advice, and all guarantees are subject to the claims-paying ability of the issuing insurance company.