Indexed Universal Life Insurance

Indexed universal life insurance (commonly called “IUL”) offers a flexible way to meet long-term financial objectives. As a type of permanent life insurance, IUL can play many roles in your financial strategy—ranging from legacy protection to building supplemental cash value. Navigating the array of policy types and matching them to your needs, however, can be challenging without clear guidance.

As a specific category within universal life insurance, IUL policies provide flexibility in premium payments, death benefit options, and policy design. You can choose how much you contribute each year (within IRS limits), and you may adjust your coverage as life circumstances change. As long as minimum insurance costs are met, your policy stays active for life.

The signature feature of indexed universal life is its cash value growth potential, which is tied to the performance of a major market index (like the S&P 500), but without direct investment risk. IUL can appeal to those seeking higher growth than fixed life insurance, yet with built-in downside protection. The sections below break down how IUL works, how it compares to other options, and advanced ways it may fit into your broader planning—including strategies like “infinite banking.”

How Does Indexed Universal Life Compare to Other Life Insurance?

	Indexed Universal Life (IUL)	Whole Life	Variable Life
Premium Flexibility	✅ Yes	❌ No	✅ Yes
Cash Value Growth	Market Index (with cap & floor)	Guaranteed Fixed	Investment Subaccounts (Market Risk)
Principal Protection	✅ Yes (0% floor)	✅ Yes	❌ No
Upside Potential	Moderate (Index-linked)	Low (Fixed)	High (Unlimited)
Policy Charges	Moderate	Lower	High
Risk Level	Low–Moderate	Low	Moderate–High

What is Indexed Universal Life Insurance?

Indexed universal life is a form of permanent life insurance that combines a guaranteed death benefit with a cash value component. Each premium payment supports both your coverage and a cash value account, which grows tax-deferred. If your policy accumulates enough value, you can access funds through withdrawals or policy loans—one reason IUL is used in advanced strategies like infinite banking (explained below).

IUL typically lets you select either a level or increasing death benefit. The level option provides a steady coverage amount (often with lower costs), while the increasing option adds your accumulated cash value to your original coverage—potentially raising both your protection and premium.

Breaking Down Indexed Universal Life Insurance

You may direct your policy’s cash value toward a fixed interest account or an index-linked account. While you’re never directly invested in the index, your interest is credited based on how the index performs. Key features include:

• Index-based growth: Cash value can increase as the index rises, up to policy limits.
• Downside protection: If the index falls, most IULs guarantee a 0% floor—so your cash value is shielded from market loss.
• Caps and participation rates: Growth is subject to annual limits (like a 10% cap or 80% participation rate), meaning you may not receive the index’s full gains.
• Policy charges: Fees and charges are deducted regardless of index returns; in flat or low years, these can reduce your account value.

Thanks to these safeguards, many people see IUL as a balanced middle ground—offering more upside than whole life insurance, yet with more protection than variable life policies.

How Index Crediting Works (Example)

Suppose your IUL is tied to the S&P 500, with a 10% cap and 0% floor:

• If the S&P 500 rises 12% in a year, your credited interest is 10% (the cap).
• If the index rises 6%, you’re credited 6%.
• If the index falls -8%, you’re credited 0%—your cash value remains steady despite market drops.

Year	Index Change	Cap / Floor	Interest Credited	Cash Value Result
1	+12%	10% / 0%	10%	Increases
2	+6%	10% / 0%	6%	Increases
3	-8%	10% / 0%	0%	No Change (minus charges)

How Often is Interest Credited?

Most IULs credit interest once per year, using a method called “Annual Point-to-Point.” On each policy anniversary, the insurer calculates how much the selected index changed from start to finish, then applies your cap and floor. Some carriers may offer different crediting periods or formulas—always review your contract for specifics.

Who Might Consider an Indexed Universal Life Policy?

• Anyone seeking permanent life insurance with flexibility in premiums and coverage
• Individuals interested in tax-deferred savings as part of their insurance plan
• People who want some market-linked growth potential but don’t want exposure to market losses
• Families, business owners, or those planning for estate, legacy, or education needs
• Those interested in advanced strategies—like infinite banking—that use IUL for tax-advantaged self-financing

Infinite Banking and IUL: Using Your Policy for Self-Financing

	Traditional IUL Uses	Infinite Banking with IUL
Primary Goal	Lifelong coverage and tax-deferred cash value	Flexible personal banking and self-financing
Cash Value Access	Supplement retirement, emergencies, major expenses	Loans for planned purchases, investments, opportunities
Funding Strategy	Flexible premiums as budget allows	Maximum funding within IRS limits to boost cash value
Repayment	Optional, as needed	Flexible; interest accrues if unpaid, impacts benefit
Risks	Lapse if underfunded, policy costs reduce value	Lapse or tax issues if loans exceed value or policy not managed

How Policy Loans Work for Infinite Banking

Step	What Happens	Key Considerations
1. Fund Your Policy	Make premium payments (ideally above minimums) to build cash value quickly	Staying within IRS “MEC” limits preserves tax advantages
2. Accumulate Cash Value	Your policy’s cash value grows tax-deferred, typically with index-linked crediting	Growth rates vary year to year; charges always apply
3. Request Policy Loan	Borrow from your policy’s available cash value for any purpose	Loan is collateralized by policy; interest charged
4. Repay at Your Pace	You decide repayment timing; no required schedule	Outstanding loans reduce death benefit until repaid
5. Maintain Policy Health	Ensure cash value stays above policy costs and loans do not exceed limits	Lapse or tax consequences possible if mismanaged

Infinite banking requires careful policy design, ongoing monitoring, and strong funding. Not every IUL or whole life contract is optimized for this strategy, so working with an insurance professional experienced in policy structure is critical.

Potential Benefits of Indexed Universal Life Insurance

• Flexibility to adjust premiums as your needs change
• Additional tax-deferred savings vehicle—can complement retirement accounts
• Cash value can grow with market index performance, with principal protection
• Option for higher death benefit if increasing benefit is selected
• Withdrawals and policy loans may supplement income, help finance major expenses, or support an infinite banking approach
• Potential to pass on greater estate value to heirs

Potential Drawbacks

• Complexity—requires ongoing attention, especially if using for infinite banking
• Premiums are higher than term or basic whole life
• Cash value growth is capped, and fees always apply
• If loans aren’t repaid and policy isn’t properly managed, policy can lapse or trigger taxes
• Outstanding loans reduce death benefit (key when using policy for self-financing)
• Surrender or lapse could have tax consequences

Indexed Universal Life: Myths & FAQs

• Myth: “IUL cash value is invested in the stock market.”
  Fact: Policy cash value is not invested in stocks. Growth is linked to an index’s performance, with protections against losses.
• Myth: “You can borrow endlessly with no impact.”
  Fact: Policy loans must be managed—unpaid loans reduce death benefit, and excessive loans can cause the policy to lapse or lose tax advantages.
• FAQ: “Can I use IUL for infinite banking?”
  Answer: Yes, IUL can be structured to support infinite banking. Not every policy is suitable, and design is crucial. Careful planning is needed to maintain the policy and avoid lapses or tax penalties.
• FAQ: “Are there risks to policy loans?”
  Answer: If loans are not repaid or cash value falls below required levels, the policy can lapse, resulting in taxes and loss of coverage.
• FAQ: “Can I adjust my premiums or death benefit?”
  Answer: IUL generally allows you to modify premiums and select between level or increasing benefit options, within contract limits.

Is Indexed Universal Life Insurance Right for You?

IUL works best for those with the resources and commitment to fund the policy consistently. It’s important to be clear on your main goals—legacy planning, retirement accumulation, self-financing (infinite banking), or covering major expenses—and to understand the moving parts and obligations.

Common reasons people use IUL:

• Protecting family or business from unexpected loss
• Reducing estate taxes for heirs
• Building accessible cash value for retirement, emergencies, or strategic borrowing
• Funding major purchases without relying on outside lenders (infinite banking)
• Paying for education, property, or opportunity investments
• Having a resource to address market downturns or unexpected costs

Other Considerations

If you need basic, short-term protection, term life insurance may be a simpler, more affordable fit. For broader benefits—including the flexibility to use your policy as a self-financing tool—permanent policies like IUL are worth considering.

Some IUL contracts provide living benefits, such as access to death benefit for qualifying illness or care needs, further expanding their utility beyond traditional coverage.

Summing It Up

Indexed universal life provides a unique mix of lifelong protection, market-linked growth, and flexible access to cash value. For some, it can even become a personal banking resource through strategies like infinite banking. However, design, funding, and ongoing management are essential—especially if you plan to borrow from your policy. For help evaluating if an IUL, infinite banking strategy, or other permanent policy fits your needs, Foxcove Financial can provide licensed insurance-based guidance.