Indexed universal life (IUL) insurance is a type of universal life insurance that provides a cash value component along with a death benefit. The money in a policyholder’s cash value account can earn interest by tracking a stock market index selected by the insurer, such as the Nasdaq-100 or the Standard & Poor’s 500. If your policy also has a fixed-rate account, you can choose how much you want to go into each account.

Although the interest rate derived from the equity index account can fluctuate, the policy does offer an interest rate guarantee, which limits your losses.1 It also may cap your gains. These policies are more volatile than fixed universal life policies, but less risky than variable UL insurance policies because IUL does not invest in equity positions.2

Key Takeaways

• Indexed universal life (IUL) insurance lets the policyholder decide how much cash value to assign to an equity-indexed account and to a fixed-rate account, if available.
• Indexed universal life is a form of permanent life insurance that (like universal life) allows for flexible premiums and possibly a flexible death benefit.
• IUL insurance policies can track a number of well-known equity indexes, such as the S&P 500 or the Nasdaq-100, to earn interest credits.
• IUL policies usually cap your returns but also guarantee a minimum interest rate.

How Does Indexed Universal Life (IUL) Insurance Work?

As with universal life insurance, IUL policies have adjustable premiums. You can underpay or skip premiums, plus you may be able to adjust your death benefit. What makes IUL different is the way the cash value is invested.

When you take out an indexed universal life insurance policy, the insurance company provides several options to select at least one index to use for all or part of the cash value account segment of your policy and your death benefit. When a premium is paid on the account, a portion pays the cost of insurance based on the insured’s life; any fees are paid; and the rest is added to the cash value.

The total cash value is credited with interest based on increases in an equity index (although your money isn’t directly invested in the stock market). If you own an indexed universal life policy, you can likely borrow against the cash value accumulated in the policy. However, if you don’t pay back your loans, they are deducted from the death benefit.