How does IUL insurance work?

IUL insurance works by combining a permanent life insurance policy with a cash value account tied to the performance of a market index. Part of your premium covers the cost of insurance, while the rest goes to the cash value account. The cash value earns interest linked to the index—subject to caps on gains and a floor (often 0%) that helps limit losses. Over time, the cash value can grow tax-deferred and may be accessed through loans or withdrawals, but high fees and limits on returns often keep growth underwhelming. As long as premiums are paid and the policy remains active, the insurance portion continues providing a death benefit.

Is IUL a good investment?

IUL insurance is a terrible investment. Its cash value growth is linked to a market index, offering some upside potential with protection against losses through built-in floors. But caps and fees limit growth so much that most IULs won’t come close to matching mutual fund returns.

What happens to IUL cash value when you die?

When you die, the cash value in an IUL policy typically doesn’t pass to your beneficiaries in addition to the death benefit. Instead, the insurer keeps the accumulated cash value and your beneficiaries receive the policy’s stated death benefit amount. Because the cash value helps fund and support that benefit over time, it’s essentially built into the payout rather than added on top—unless you’ve specifically chosen a policy option that increases the payout to include it.

What is a cap and floor in IUL?

In IUL insurance, the cap and floor define the limits of how your cash value earns interest based on a market index like the S&P 500. The cap is the maximum interest rate you can earn in a defined period, even if the index performs higher. The floor is the minimum guaranteed rate (often 0%), which protects your cash value from some market losses. Together, they create a trade-off: limited upside in exchange for downside protection.

What are max-funded and level options in an IUL?

Max-funded and level-option are two basic types of IUL. The main difference is in what most of your premium goes toward—the cash value (investment) part or the death benefit (insurance) part. In a max-funded IUL, more of your premium goes into the cash value part of the policy. Salespeople say this will help you grow your cash value faster. And while these policies have a floor to help limit losses if the market index tied to the IUL goes down, they also cap your returns. This type of IUL also has more fees. A level-option IUL focuses on the insurance side of the policy and is your typical kind of IUL. This means more of your premium goes toward the death benefit.

What Is Indexed Universal Life Insurance (IUL)? How It Works, Pros and Cons

Q: What is indexed universal life (IUL) insurance?

IUL is a type of permanent life insurance that combines a death benefit with a cash value component that can grow over time based on the performance of a stock market index, like the S&P 500.

14 MIN READ | JUN 3, 2026

By George Kamel

Reviewed by Jeff Zander

Key Takeaways

Indexed universal life (IUL) insurance is a type of permanent life insurance that includes a death benefit and a cash value component.
The cash value earns interest credits linked to the performance of a stock market index (like the S&P 500) but is not directly invested in the market.
These policies come with a lot of fees, and the investments rarely perform well enough to beat inflation.
Instead of IUL, go for term life insurance to replace your income if you die and good growth stock mutual funds to build wealth.

Life insurance is on the same list with water or oxygen or a stretchy pair of pants—essentials everyone needs for survival. But there’s one kind of coverage being served up over the past few years that I hope you don’t fall for: indexed universal life insurance.

Here's A Tip

Indexed universal life (IUL) insurance is a type of permanent life insurance that combines a death benefit with a cash value account tied to a stock market index. But here’s the problem: Return caps, fees and complexity limit your returns so much that it’s a terrible way to invest. Most people are way better off buying term life insurance while investing separately in mutual funds.

IUL is a rip-off packaged with a slick sales pitch: “Protect your family with life insurance and grow your money at the same time.” Who wouldn’t want that? Let’s take a look under the hood to see why IUL insurance angers me more than people talking on speakerphone in public.

What Is Indexed Universal Life (IUL) Insurance?

IUL is whole life insurance with a cash value component linked to a market index like the S&P 500. As we mentioned, it’s known for high fees, return caps and complexity—things you’re better off avoiding by pairing term life insurance with investing in tax-advantaged retirement accounts.

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So, those are the basics. But check this out: Insurance is not an investment. Whenever you see an insurance product that also tries to be a savings or investment account, that’s a huge red flag. Because that kind of multitasking almost always leads to neither job getting done well.

How Does Indexed Universal Life Insurance Work?

IUL insurance uses your premiums to pay for two features:

A life insurance payout for your family or estate
A cash value account that’s linked to the performance of a stock market index (that’s why it’s called indexed)

IUL insurance is sold as a flexible plan that lets you set your own premiums and put money into a savings account with an interest rate that tracks the performance of a stock market index (like the S&P 500). Basically, IUL puts a new spin on a bad idea.

Don’t get me wrong—I’m a huge fan of life insurance, specifically level term life insurance. But not all life insurance is created equal, and I’d never recommend any form of whole life or universal life insurance. It’s a bad deal for you every time.

What Are the Key Features of IUL?

The key features of IUL—like caps, floors and participation rates—are designed to limit how much you gain while ensuring the insurance company still profits. So, before we go any deeper into a financial product that’s (let’s be honest) pretty complex, we should take a quick minute to define the key terms that come into play with IULs:

Premium allocation: How the insurance company splits up your premium toward either the cost of insurance and fees or the cash value
Index-linked crediting: The way an IUL’s cash value earns interest—based on the performance of a stock market index, which is not the same as direct investment
Cap: The maximum return the insurer will credit to an IUL’s cash value in a defined period (so if the stock market was way up, your returns won’t be nearly as . . . up)
Floor: The minimum guaranteed credit (often 0%) built in to give policyholders some protection against market losses (but even a floor won’t prevent fees from eating up your cash value!)
Participation rate: The percentage of the index’s gain that gets credited to the IUL’s cash value in a given period, usually set somewhere between 50% and 100%—but keep in mind that even at 100%, those caps can still limit your final gains
Spread: A percentage the company may subtract from the index’s gain before adding the remaining interest to your account

How IUL Returns Are Limited

Feature	What It Means	Impact on You
Cap	Maximum return	Miss out on strong market gains
Floor	Guaranteed minimum credit (often 0%)	Can still lose money because of fees
Participation rate	Percentage of gains credited	Don’t get full market returns
Spread	Percentage taken out before gains are credited	Lowers your return
Fees	Multiple charges and expenses	Shrink your cash value growth

I just want to call out that three of those—caps, participation rates and spreads—are ways the insurer limits your returns. And I haven’t even gotten into the fees yet.

Is IUL Insurance Worth It? Pros and Cons

IUL insurance may offer tax-deferred growth and lifelong coverage, but high fees and capped returns make it an inefficient and expensive way to build wealth.

Like I’ve been saying, I’m not a fan of IULs. But to be as fair as possible (and to make it absolutely clear where I stand), it’s probably a good idea to look at the cons—and even the pros—of this kind of life insurance.

Benefits of IUL Insurance

The “benefits” of IUL are mostly marketing points that sound appealing but don’t hold up when you compare them to simpler, more effective options:

It includes a cash value account (some people might refer to it as an IUL account) that can grow through modest returns based on how well a certain stock market index does.
Over time, the cash value can grow tax-deferred and may be accessed through loans or withdrawals. (But growth in a traditional 401(k) would be tax-deferred too.)
The death benefit is in force (aka active) permanently—as long as you keep up with the premiums. (But if you’re staying out of debt and building wealth with the Baby Steps, you’ll eventually become self-insured.)
Speaking of premiums, they’re usually flexible with an IUL, which can help if you’re in a budget crunch. But I have to point out that if you lower your premiums too much, your cash value might not keep up with the policy’s fees and rising insurance costs—which could cause the policy to lapse.
Sometimes an IUL includes a minimum guaranteed rate of return, or floor, protecting the policyholder from unlimited losses. But even with the guarantee, an IUL is highly unlikely to build as much cash value as you’d get from actually investing in growth stock mutual funds.
IUL fans (which are mostly the people who sell it) promote the fact that the policy lets you take out tax-free loans. What? Loaning yourself money from your own cash value? Yes, it’s a thing—a very stupid thing you should never do. But hey, some people just want to see their money burn while thinking they’re financial whizzes.

Drawbacks of IUL Insurance

The biggest drawback of IUL insurance is that fees and limits on returns work together to keep your money from growing the way it should.

Let’s take a deeper look at all the problems:

If you have a max-funded IUL (which means most of your premium goes to build cash value), your growth will always be limited by the cap set by the insurance company—no matter how well the index performs. For example, if the cap is set at 10%, but the index grows a lot one year, you’ll still only get 10% returns. Plus, the insurance company can change the cap whenever they want (including downward). If the stock market does poorly one year, they can set the cap even lower—and you’ll get even less than the crappy returns you would’ve made.
The cash value in an IUL rarely performs the way salespeople promise because fees and return limits eat away at your growth.
Those aren’t the only fees you’ll pay with an IUL. These policies also come with sales commissions, rider fees, administrative expenses, premium expense charges and the surrender charge (yep, there’s a charge for ending the policy). And even in years when the index gave you zero returns, all those fees can still shrink your cash value. In other words, the fees can go past that floor and right to the bottom of your cash value.
To make any of this work, you’d have to keep a real close eye on your cash value growth and all the fees you’re paying. And that’s just to be sure the policy doesn’t lapse! Don’t get me started on how insanely hard it would be to get a decent return.
When you cancel an IUL policy, you give up two huge things—your death benefit and, even worse, most or all of the cash value you’ve managed to build. Makes you wonder what exactly you were getting for all those high premiums.
Because the pesky fees keep returns pretty low, the investments rarely perform well enough to beat inflation, which is one of the main goals of investing. That’s a terrible deal. Check out investing in mutual funds through a Roth IRA or 401(k) if you want to get ahead of inflation and actually build wealth.
Don’t forget the rising cost of life insurance as you age. Unlike term life, which locks you into an affordable rate for as long as you have the policy, the life insurance coverage in an IUL becomes more expensive over time. What if your cash value doesn’t grow enough to cover those costs? You’ll either pay higher premiums or simply lose your coverage.
Market performance affects your premiums, which might rise or fall depending on how well the stock market index your IUL tracks performs. But premiums can definitely rise in a down period. And remember what we discussed about unaffordable premiums? You’ll risk losing the life insurance coverage that was supposed to be the whole point of buying the policy! It’s like signing a prenup that lets your spouse ditch you if your portfolio dips—a bad deal all around.

Again, an IUL tries to solve two unrelated financial issues and is no good at solving either. Having the two services wrapped together winds up making the insurance portion very expensive, especially compared to what you’d pay for another option.

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How Does IUL Compare to Other Life Insurance?

I think it’s pretty clear already that an IUL isn’t your best bet for life insurance. But let’s compare it with a few other kinds.

How Does IUL Compare to Term Life Insurance?

Term life insurance is better than IUL for most people because it’s far cheaper, simpler and designed to replace your income—while you invest separately for real growth.

The real purpose of life insurance is to guarantee that the people who depend on your income are taken care of if something happens to you.

Term life insurance is designed to keep coverage simple. Based on your age, term life companies look ahead 15 or 20 years and figure out the average price to insure you over that time. Then you buy coverage that lasts roughly as long as you’ll have people depending on your income. The younger and healthier you are, the cheaper the rate will be.

It’s way cheaper than what you’d get with any form of permanent coverage. And the price is locked in throughout the life of the policy—no fluctuating premiums and no worries about a bad performance from the index tied to your cash value wiping out your policy. Once you no longer need life insurance, you can drop the premiums and invest the savings through your tax-advantaged retirement accounts. Doesn’t that sound like a much smarter way to be sure your family is covered? (Hint: It is.)

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IUL vs. Term Life and Investing

Feature	IUL	Term Life and Investing
Cost	High	Low
Investment growth	Limited by caps and fees	Full market growth potential
Complexity	Very complex	Simple
Flexibility	Low	High
Best for . . .	Nobody	Income protection and wealth building

IUL is designed to last your whole life, which means you’re paying for life insurance way longer than you need to (because, as I mentioned earlier, if you follow the Baby Steps, you should be self-insured by the time your kids fly the nest—meaning you’ve got a paid-for house and plenty of money in investments).

How Does IUL Compare to Whole Life Insurance?

IUL and whole life insurance are both forms of permanent life insurance that combine insurance with investing—and both are poor choices compared to term life and mutual fund investing.

I’m not a fan of either kind, but some IULs will have a guaranteed minimum interest rate. That means it’s possible you’ll see slightly better returns on your cash value with an IUL than with whole life. Overall, it’s like comparing Peloton versus NordicTrack: There are differences, but you’re getting a similar product either way.

How Does IUL Compare to Variable Life Insurance?

Variable life insurance gives you more investment options than IUL, but it still mixes insurance and investing—making it a complicated and inefficient way to build wealth.

Once again, we’re talking about two different forms of permanent life insurance—otherwise known as two flavors of something gross (like those congealed salads your Aunt Donna brings to Thanksgiving every year).

Unlike an IUL, a variable life policy lets you pick from a variety of investment options to put your cash value into. Big whoop. It still messes with your life insurance, and it doesn’t compare as an investment to good old mutual funds. Hard pass.

Who Is IUL Insurance For?

Who’s it for? It’s for the insurance companies to make more money from you and reduce risk for them. That’s it.

So, if IUL insurance is such a scam, why would someone pick it?

Well, if you’re planning to retire and you love your family—and that’s practically everybody—combining savings and a death benefit in an IUL might sound like a win-win. I get the thought process . . . sort of. But while a few of the features in an IUL seem appealing, I think we’ve seen there are really more catches here than in a game of Pokémon Go (I’m told that’s a relevant reference).

An IUL is a terrible wealth-building tool. To repeat, trying to build wealth through an insurance company is an extremely overrated strategy. And the only ones who will tell you otherwise are the slimy life insurance salespeople selling it.

I even heard from a Ramsey customer who told about her own experience of meeting with an IUL salesperson she wisely steered clear of. Lindsey B. shared the story in THE Ramsey Baby Steps Community Facebook group.

“My husband and I recently spoke with a financial advisor who was nothing more than an IUL salesman. The chart they showed with the potential growth sounds great and all, but requires a minimum $900/month contribution increasing over the years. My husband and I have decided to max out Roth IRAs instead because as I told him, ‘Millionaires don’t get rich off life insurance.’”

That’s right, Lindsey.

If the problems with IUL investing still aren’t clear, think about how the insurance company will pay out interest. The performance of a stock market index is measured by taking the average of the returns from a large group of funds. We emphasize average because in the investment game, you want better than average. So, while stock market index performance generally trends up over the long term, plenty of good growth stock mutual funds outperform stock market indexes. That’s why they’re our top choice for long-term wealth building.

Plus, since this is an investment, it’s subject to the same risk all investments share—you could lose money. With an IUL, your cash value could shrink or disappear completely if the IUL doesn’t have a guaranteed minimum rate of return. That sucks. This is why I’m telling you an IUL does a terrible job at being both a death benefit and an investment opportunity.

To recap on IULs, you’re looking at a sucky form of investment that doesn’t give you much buying flexibility or above-average rates of return. Not to mention, all the insurance fees end up devouring the already unimpressive cash value growth.

What Should You Do Instead of Buying IUL?

The best strategy is to keep insurance and investing separate: Buy term life insurance for income replacement, and invest in growth stock mutual funds for long-term wealth.

Your family and your future (wealthier) self will thank you.

How much does term life insurance cost?

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Get the Right Life Insurance

Above all, life insurance has one job: to replace your income when you die. That’s it. IUL might do that, but it might also rob you blind before the benefits ever pay out. Life insurance is there to provide for your loved ones, not make them rich. Maybe you’re thinking, Yeah, IUL does sound like a big mess—but I’m still not completely sure what to do next.

Let me give you some next steps toward getting the best coverage possible for you and your family.

Next Steps to Get the Right Life Insurance Coverage

If you already have IUL insurance and this article convinced you to switch to term life, be sure to get the term life coverage in place and active before canceling your existing policy. That current policy is better than nothing, and you never want a gap in coverage for life insurance—even a brief one.
If you have a lot of general questions about coverage, check out the Ramsey term life resource page.
Or if you’re wondering how much coverage you should get, check out this handy term life calculator to get a realistic idea of how much coverage you need for your specific situation.
Maybe you’re curious about cost: Try this term life estimator to get a solid sense of how much you can expect to pay for term life insurance.
Once you’re in the market for new life insurance or want to talk to an expert, I recommend working with RamseyTrusted^® provider Zander Insurance to get your free term life insurance quotes today.

Get My Quotes

What is indexed universal life (IUL) insurance?: IUL is a type of permanent life insurance that combines a death benefit with a cash value component that can grow over time based on the performance of a stock market index, like the S&P 500.
How does IUL insurance work?: IUL insurance works by combining a permanent life insurance policy with a cash value account tied to the performance of a market index. Part of your premium covers the cost of insurance, while the rest goes to the cash value account.

The cash value earns interest linked to the index—subject to caps on gains and a floor (often 0%) that helps limit losses. Over time, the cash value can grow tax-deferred and may be accessed through loans or withdrawals, but high fees and limits on returns often keep growth underwhelming.

As long as premiums are paid and the policy remains active, the insurance portion continues providing a death benefit.
Is IUL a good investment?: IUL insurance is a terrible investment. Its cash value growth is linked to a market index, offering some upside potential with protection against losses through built-in floors. But caps and fees limit growth so much that most IULs won’t come close to matching mutual fund returns.
What happens to IUL cash value when you die?: When you die, the cash value in an IUL policy typically doesn’t pass to your beneficiaries in addition to the death benefit. Instead, the insurer keeps the accumulated cash value and your beneficiaries receive the policy’s stated death benefit amount. Because the cash value helps fund and support that benefit over time, it’s essentially built into the payout rather than added on top—unless you’ve specifically chosen a policy option that increases the payout to include it.
What is a cap and floor in IUL?: In IUL insurance, the cap and floor define the limits of how your cash value earns interest based on a market index like the S&P 500. The cap is the maximum interest rate you can earn in a defined period, even if the index performs higher. The floor is the minimum guaranteed rate (often 0%), which protects your cash value from some market losses. Together, they create a trade-off: limited upside in exchange for downside protection.
What are max-funded and level options in an IUL?: Max-funded and level-option are two basic types of IUL. The main difference is in what most of your premium goes toward—the cash value (investment) part or the death benefit (insurance) part.

In a max-funded IUL, more of your premium goes into the cash value part of the policy. Salespeople say this will help you grow your cash value faster. And while these policies have a floor to help limit losses if the market index tied to the IUL goes down, they also cap your returns. This type of IUL also has more fees.

A level-option IUL focuses on the insurance side of the policy and is your typical kind of IUL. This means more of your premium goes toward the death benefit.

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About the author

George Kamel

George Kamel is the #1 national bestselling author of Breaking Free From Broke, a personal finance expert, a certified financial coach through Ramsey Financial Coach Master Training, and a nationally syndicated columnist. He’s the host of the George Kamel YouTube channel and co-host of Smart Money Happy Hour and The Ramsey Show, the second-largest talk radio show in America. George has served at Ramsey Solutions since 2013, where he speaks, writes and teaches on personal finance, investing, budgeting, insurance and how to avoid consumer traps. He’s been featured on Fox News, Fox Business and The Iced Coffee Hour, among others. Learn More.