Guide · Coverage · 3 min read

How does indexed universal life work?

Indexed universal life, or IUL, is permanent coverage with a cash value tied to an index formula. It has more moving parts than term or whole life.

How the cash value gets its credits

The cash value is credited using a formula based on an index such as the S&P 500. None of it is placed in stocks on your behalf. The formula usually applies a cap, a participation rate, or both, which limit how much of the index gain you receive. Most policies also have a floor, often zero, so in a down year the credited rate does not go below that floor. Monthly policy costs are deducted either way, so the cash value can still shrink.

Flexible premiums and rising costs

You can often choose how much to pay and when, within limits. Each month the insurer takes out the cost of insurance and other fees. The cost of insurance typically rises as the insured person ages.

The risk of lapse

When payments run short, or credits land below the projection, the cash value may not cover the monthly charges. The policy can then lapse, and the death benefit ends with it. Ask how the insurer will warn you.

Illustrations and access to cash

A sales illustration shows projected values based on assumptions. It is not a promise of what the policy will do. Ask to see a version that uses lower credited rates.

Loans and withdrawals from the cash value reduce the death benefit, and they can raise the odds of a lapse.

This guide gives general information and does not address your own policy. Your contract and your insurer decide what applies to you.