What Is an IUL Policy and How Does It Work?

When it comes to planning for your financial future, life insurance often plays a crucial role. One option growing in popularity is an Indexed Universal Life (IUL) policy — a flexible financial tool that offers both life insurance protection and the potential to build cash value over time. But what exactly is an IUL, and how does it work?

What Is an IUL Policy?

An Indexed Universal Life insurance policy (IUL) is a type of permanent life insurance that not only provides a death benefit to your beneficiaries but also includes a cash value component. Unlike whole life insurance, which typically offers fixed returns, the cash value growth in an IUL is tied to the performance of a stock market index, such as the S&P 500.

How Does an IUL Work?

Here’s a breakdown of how an IUL functions:

1. Premium Payments

Like other insurance policies, you pay a premium. Part of your premium goes toward the cost of insurance (COI) — which pays for the death benefit — and administrative fees. The remaining amount is deposited into your policy’s cash value account.

2. Cash Value Growth

The cash value of your IUL grows based on the performance of a chosen market index, but it doesn’t actually invest your money in the stock market. Instead, your policy is credited interest based on the index’s gains — up to a cap (e.g., 10–12%) and never below a floor (typically 0%).

This means:

• If the market performs well, your policy earns interest up to the cap.

• If the market performs poorly, your cash value won’t decrease due to market losses — it will just earn zero interest.

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3. Flexibility in Premiums and Benefits

One of the key benefits of an IUL is flexibility. You can:

• Adjust your premium payments (within limits).

• Increase or decrease your death benefit.

• Use your cash value to help cover premiums in the future if the balance is sufficient.
  

4. Tax-Deferred Growth

Cash value in an IUL policy grows tax-deferred, meaning you don’t pay taxes on the gains while the money remains in the policy. You can also take out tax-free loans or withdrawals from the policy, as long as it's properly managed.

Advantages of an IUL

• Market-linked growth with downside protection

• Flexible premiums and death benefit options

• Tax-advantaged cash value accumulation

• Potential source of retirement income
  

Things to Keep in Mind

While an IUL can be a powerful tool, it’s not for everyone. Some considerations include:

• Caps and participation rates can limit upside growth.

• Policy fees and COI can reduce cash value over time.

• Mismanagement (e.g., excessive loans) can cause the policy to lapse.
  

Is an IUL Right for You?

If you’re looking for life insurance coverage with the potential for long-term cash accumulation, an IUL might be worth exploring. It’s especially beneficial for individuals with a long-term outlook who want both protection and tax-advantaged growth.

At Avalon Tax & Financial Services, we help our clients understand how IUL policies can fit into their broader financial strategy. Contact us today for a personalized consultation and see if an IUL makes sense for your goals.