What are the cons of an IUL?
Asked by: Lillian Tremblay | Last update: November 17, 2025Score: 4.6/5 (23 votes)
What is the downside of an IUL?
Con: Index Growth Options Are Capped or Diluted
Generally, an IUL product will capture only a portion of the stock market's annual gains, since the market usually moves up violently in spurts. Oftentimes, your IUL's annual growth will get cutoff wherever your IUL's cap happens to be (around a 9-10% cap in 2023).
Can you lose money in an IUL policy?
As an investment, an IUL does include risk—so yes, you could lose money. The only exceptions would be if your IUL has a guaranteed floor for value or a minimum rate of return (guaranteed floor just means the life insurance company promises your account won't go below a certain amount).
What is the 7 pay rule for IUL?
What Is the 7-Pay Rule for IUL? The 7-pay rule is a federal tax qualification test applied to life insurance policies, including Indexed Universal Life policies, to determine how much in policy premiums you can pay in policy premiums over its first seven years (or seven years after a material change).
Why do rich people use IUL?
Indexed universal life (IUL) insurance offers several compelling advantages for estate planning: Large, Tax-Free Death Benefit: The money paid to your beneficiaries is generally tax-free, allowing for the efficient transfer of a greater portion of your wealth.
This Is Why Universal Life Insurance Is CRAP!
What is better than a IUL?
IUL vs.
Indexed universal life (IUL) policies have flexible payments with cash accumulation pegged to the performance of an equity index. Whole life insurance is safer and simpler. IUL has higher upside potential, but is riskier and takes more work to manage.
Can you take money out of IUL?
Loan availability: Depending on your policy and available cash, you can borrow money from your IUL without facing penalties, taxes or a credit check. You also don't have to pay back the money you take out.
Is IUL better than 401k?
IUL contracts protect against losses while offering some equity risk premium. IRAs and 401(k)s do not offer the same downside protection, though there is no cap on returns. IULs tend to have have complicated terms and higher fees.
How much money can I put in a IUL?
There is no contribution limit on an IUL policy, unlike an IRA or 401(k).
How soon can I borrow from my IUL?
You can generally borrow money from your life insurance policy once the cash value component has met a certain minimum threshold. However, to take the loan you want, the cash value balance must also reach an adequate level to provide collateral for the loan size you want.
Why not to buy an IUL?
No Guaranteed Returns: While IUL policies offer the potential for higher returns compared to traditional fixed policies, they do not guarantee them. The actual returns you experience will depend on the market performance and the specific terms of your policy.
Which is better, IUL or Roth IRA?
They also provide tax-free income in retirement. Therefore, investors concerned about their family's welfare after they're gone may prefer an IUL, while those who want a tax-free income stream during retirement can opt for a Roth IRA.
Can I cancel my IUL?
An IUL policy may be canceled if you stop paying premiums. In general, these policies are best for those with a large up-front investment who are seeking options for a tax-free retirement.
Who has the best IUL?
- IUL with the Best S&P Strategies + Guarantees: Penn Mutual.
- IUL with the Best Company Strength: Nationwide.
- IUL with the Widest Selection of Strategies: Allianz Life.
- IUL with the Best Response to Rising Rates: Columbus Life.
- IUL with the Best Chronic Illness Rider: National Life Group.
How can you lose money in an IUL?
You typically cannot lose money in an Indexed Universal Life (IUL) policy due to a 0% floor, which prevents cash value losses from market downturns. However, fees and policy costs can reduce cash value over time, especially if credited interest is low or nonexistent in certain years.
What is the average return on an IUL?
IUL policies typically allow you to grow a portion of your premiums through allocation to an index. Insurers often offer a growth cap of 8-9% and floor of 0%. This allows for upside potential with downside protection.
What are the cons of IUL?
IUL policies are usually complex and often come with higher costs compared to other retirement savings options. The fees associated with IULs, such as administrative fees, cost of insurance and surrender charges, can eat into the cash value, reducing overall return on investment.
Can I use my IUL to buy a house?
IUL Policy Loans
For example, you may take a policy loan from the cash value account to help buy a property, pay school fees, or expand your business. Keep in mind, if you take a policy loan you are borrowing from issuing insurance company with your own money.
How much money can I take out of my IUL?
The amount you can borrow depends on your policy's accumulated cash value. Typically, you can borrow up to 90% of this value with an index universal life insurance policy. However, it's essential to remember that enough cash value must remain to cover policy fees and ensure your life insurance stays in force.
What is the max fund for IUL?
A max-funded Indexed Universal Life (IUL) policy is designed to build maximum cash value by funding the policy up to legal premium limits. This structure enhances cash growth potential without triggering tax penalties, making it a strategy for those seeking life insurance with significant tax-advantaged savings.
Who should get an IUL?
An IUL insurance policy may be canceled if you stop paying premiums. IUL policies are generally best for those with large up-front investments who want options for a tax-free retirement.
How do you pay back an IUL loan?
If you repay all or a portion of the loan, options include periodic payments of principal with annual payments of interest, paying annual interest only, or deducting interest from the cash value. “Loans have an interest rate like any other type of loan," says Reich.
What is an IUL for dummies?
Indexed universal life (IUL) insurance is a type of permanent life insurance, which means it can last your entire life and builds cash value.