Indexed Universal Life Insurance (IUL), Explained

love life insurance—it’s the absolute smartest way to guarantee your loved ones will be provided for if anything happens to you.

But not all life insurance policies are created equal. IUL is a rip-off sold as a flexible plan that lets you set your own premiums and put money into a savings account that follows a little something known as an index fund.

Here’s a Tip:

When you throw investing or savings into the mix with life insurance, you’ll pay for pricey premiums and get measly returns on your investment. We recommend getting an affordable term life insurance policy and investing separately into good growth stock mutual funds.

What Is Indexed Universal Life (IUL) Insurance?

It uses your premiums to pay for two features:

  • A life insurance payout for your family or estate
  • A cash value account that follows an index fund (that’s why it’s called indexed)

But here’s the deal:

  • Any insurance product that also tries to be an investment or savings account? Huge red flag.
  • IUL premiums rise as you age, so if they get too high to be covered by your cash value or other savings, your policy could lapse. Yikes.

Why Someone Would Pick IUL

Combining a retirement plan with life insurance might sound like a tempting way to take care of your loved ones, but there are more catches than a game of Pokémon Go.


  • It includes a cash value account that can have a modest return based on how well a certain index fund does.
  • Investment growth is tax-free (like many kinds of retirement accounts).
  • The death benefit stays in force permanently—if premiums don’t lapse.
  • Sometimes an IUL includes a minimum guaranteed rate of return.


  • The investments in an IUL never perform like they should because management fees eat it up.
  • You’ll face a lot of other fees with an IUL (even to end your policy).
  • If you cancel your policy, you’ll lose your death benefit and any cash value you’ve managed to build.
  • Because of pesky fees, your IUL investment will never beat inflation (which is one of the main goals of investing). You’re far better off investing in mutual funds through a Roth IRA or 401(k) (10–12% average annual return).
  • Since your investment account rises and falls with the index fund it follows, you could end up with too little to cover your premium—and even lose your policy. Talk about a crappy deal.

How IUL Insurance Works

Even if you’re an investing rookie (we all start somewhere), you’ve probably heard of the stock market. And I’m all for investing in the stock market, but not with your life insurance!

Popular Indexes: The Dow Jones Industrial Average and S&P 500 (no relation to the Indy 500 sadly) measure how well the market is doing.

Index Funds: These invest in the companies included in a specific index.
You can invest in the S&P index fund, for example, which mirrors the performance of the largest 500 companies in the U.S.

IUL Follows Index Funds: The cash portion of your life insurance policy follows an index fund. As long as the market does well, your cash value will go up and can help cover premiums.

The Catch (There always is with any permanent life insurance tied to an investment.):

  • Remember, your return on investment will always be slightly lower than the performance of the index because of all the fees.
  • You get more expensive to insure as you age—and since IUL premiums aren’t level, they’ll rise too. So, if your cash value holds steady (or even dips), paying just to keep your policy could wipe out any cash value you’ve saved. 

Is an IUL Better Than a 401(k)?

An IUL is totally inferior to a 401(k)—or any kind of tax-advantaged retirement account that invests in growth stock mutual funds. Stick to your 401(k).

Above all, life insurance has one job: to replace your income for your loved ones when you die. That’s it. IUL might do that, but it might also rob you blind before you ever see the benefits pay out.

Next Steps to Get the Right Life Insurance Coverage

  • If you have a lot of general questions about coverage, check out the Ramsey term life resource page.

  • If videos are more your jam, hop over to our Ramsey insurance YouTube channel.

  • Once you’re in the market for new life insurance or want to talk to an expert, I recommend working with our RamseyTrusted partner Zander Insurance to get your free term life insurance quotes.

Learn the Smarter Way to Do Life Insurance

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