Cash value strategy
Indexed universal life
Permanent coverage where cash value is credited based on the performance of a market index, with a floor that limits losses and a cap that limits gains. It's the most oversold product in the industry and also a legitimately useful one — the difference is entirely in how it's funded.
- Typical floor
- 0% — a down index year credits zero, not a loss
- Typical constraint
- A cap or participation rate limiting the credited gain
- Index dividends
- Not credited — you don't own the index
- Best fit
- High income, 401(k) and IRA already maxed, 15+ year horizon
How the crediting actually works
Your premium first covers the cost of insurance and policy charges. What's left goes into the cash value, where you allocate it among index accounts and usually a fixed account.
The insurer doesn't invest your money in the index. It buys options tied to the index, and the outcome of those options funds your crediting. At the end of each segment period — typically a year — the insurer looks at index movement and credits your account subject to three limits:
- The floor sets the minimum credit, typically 0%. In a year the index falls, you're credited nothing rather than losing account value to the market.
- The cap sets the maximum. If the cap is 9% and the index rises 20%, you're credited 9%.
- The participation rate credits a percentage of the index gain. At 70% participation, a 10% index move credits 7%.
Dividends aren't included in the index measurement, which is a meaningful long-run drag compared with owning the index directly.
The part that gets glossed over
Caps and participation rates are typically not guaranteed for the life of the policy. The contract sets a guaranteed minimum, but the current cap can be lowered by the insurer after issue. A policy sold on a 10% cap may not have a 10% cap in year twelve.
Meanwhile the cost of insurance inside the policy rises as you age and is deducted from cash value. In a well-funded policy, growth outpaces those rising charges. In an underfunded one, charges eat the account, and a policy sold in your forties can be at risk of lapsing in your seventies — at exactly the moment replacing it is unaffordable.
- Accessing cash value
- Usually through policy loans, which aren't taxable while the policy stays in force
- The loan risk
- If a heavily loaned policy lapses or is surrendered, the untaxed gain becomes taxable all at once — potentially a large bill with no cash to pay it
- MEC limit
- "Maximum funded" means funded to just under the modified endowment contract threshold, preserving favorable loan treatment
- Surrender charges
- Commonly apply for the first 10–15 years, sometimes longer
Who IUL actually fits
The product isn't the problem. Mismatched buyers are.
Reasonable fit
- You've maxed your 401(k) and IRA and want another tax-advantaged place to put money
- You can commit to funding it at or near the maximum for 15 or more years
- You want permanent death benefit anyway, and cash value is secondary
- You value a 0% floor enough to accept a capped upside
- You'll review the policy annually and adjust funding if crediting underperforms
Poor fit
- You're buying it minimum-funded as a cheaper-feeling replacement for term insurance
- Your retirement accounts aren't maxed yet
- Your income is variable and you may not be able to keep funding it
- You need coverage primarily to protect dependents for the next 20 years — that's what term does, for far less
- You were shown only the non-guaranteed column
Get an IUL illustration you can actually evaluate
Including the guaranteed column, the funding level required to keep it healthy, and an honest comparison to buying term and investing the difference.
Get IUL quotes