Indexed Universal LifeTax-Free Retirement. Zero Downside.

Indexed universal life (IUL) is permanent life insurance that pays a death benefit and builds a cash value account. The cash value earns interest linked to a stock market index, such as the S&P 500. Your money is not invested in the index or in the market. The insurance company credits interest based on how the index moved, after applying limits such as a cap.

Because an IUL is life insurance, your state insurance department regulates it. FINRA, the securities industry regulator, says indexed universal life is generally not considered a security. Premiums are flexible within limits, but what you pay has to cover the policy's charges or the policy can lapse.

Each crediting period, usually a year, the insurer measures how the chosen index changed and credits your cash value with a share of any gain, up to a limit. If the index is flat or down, the credit for that period is 0%. Four terms set the limits:

• Cap: the highest rate the policy will credit. With a 10% cap, an index gain of 14% credits 10%.
• Participation rate: the share of the index gain you receive. At 80%, an index gain of 10% credits 8%.
• Spread (or margin): a set percentage subtracted from the gain. A 2% spread turns a 9% index gain into a 7% credit.
• Floor: the lowest rate credited for a period. Most IUL policies use 0%.

Caps, participation rates and spreads are usually not guaranteed for the life of the policy, so the insurer can change them within the limits in your contract. Many indexed products also count only the index's price change and leave out dividends.

Yes, the cash value in an IUL can go down, even though the index credit is never below 0%. The floor protects the interest credit from a market drop. It does not stop the policy's own charges.

Each month the insurer deducts the cost of insurance, which pays for the death benefit, plus administrative and other fees. The cost of insurance rises as you age, and the insurer can raise its rates up to the maximums stated in your policy. In a 0% year the charges still come out, so cash value can shrink. If cash value falls too low to cover the charges, the policy can lapse unless you add premium.

The early years matter too. It takes a permanent policy years to build cash value, and you might pay a surrender fee if you cancel early. Ask for the surrender charge schedule in writing before you buy.

An IUL illustration is a year-by-year projection of your premiums, cash value, death benefit and loans. It is the closest thing to an IUL retirement calculator, because it uses your age, health, premium and the policy's actual charges. A generic online calculator cannot know those details.

Every illustration shows two kinds of numbers. The illustrated (non-guaranteed) column assumes the insurer keeps today's caps, participation rates and charges, and it assumes an index rate. The guaranteed column shows the least favorable terms the contract allows. Real results land somewhere in between, and they depend on what the index does and on what the insurer chooses to credit and charge.

State regulators set rules for these projections. The NAIC's Actuarial Guideline 49-A limits the index rate an illustration may assume, limits the policy loan leverage it may show, and requires added consumer disclosures. Even so, no illustration can promise a result.

1. Read the guaranteed column. See what happens if caps fall and charges rise to the contract maximums. Does the policy stay in force?
2. Ask for a lower-rate version. Request the illustration at a lower assumed index rate, so you see a result that does not depend on good years.
3. Check the loan assumptions. Find the loan interest rate and how the illustration credits the borrowed portion. Your own loan costs and credits may differ.
4. Get the surrender charge schedule. Know which year you could leave without a charge.
5. Plan to re-check every year. Ask for an in-force illustration each year. Wisconsin's insurance regulator says you can request one free once a year.

Want an illustration built around your age, health and goals? Ask for a personal illustration on our contact page and a licensed agent will walk you through both columns.

An IUL can give you tax-advantaged income under current federal law, but tax-free is never guaranteed. The tax treatment depends on how the policy is built and kept, and the law can change. Here is how the main rules work:

• Growth is tax-deferred. To count as life insurance for tax purposes, a policy must meet the tests in Internal Revenue Code section 7702. Cash value growth inside it is not taxed each year.
• The death benefit is generally not taxable income to your beneficiary, according to IRS Publication 525.
• Taking out more than you paid in premiums will probably trigger income tax on the extra.
• Policy loans are generally not taxed while the policy stays in force and is not a modified endowment contract (MEC). A loan is not income, but it accrues interest and reduces what is left for you and your family.
• A MEC is taxed differently. If you pay too much premium too quickly in the first seven years, the policy becomes a MEC under section 7702A. Loans and withdrawals from a MEC are taxed as income first, and a 10% additional tax generally applies before age 59 and a half.
• If the policy lapses or you cancel it with a loan outstanding, the gain can become taxable all at once, and you may have no cash left to pay the tax.

Tax rules are complex and depend on your situation. Talk to a tax professional before you build a retirement plan around any policy.

With an IUL loan, the insurer lends you money and holds your cash value as collateral. You are borrowing from the insurance company rather than withdrawing your own money, so the policy stays in force. Policy loans usually have no fixed repayment schedule, but they charge interest.

Any unpaid loan and interest is subtracted from the death benefit when you die. If the loan balance grows larger than the cash value can support, the policy can lapse. That is why loans need regular monitoring.

• Borrow a modest share of your cash value, not the maximum.
• Know the loan interest rate and whether it can change.
• Review an in-force illustration every year.
• Keep paying premium, or confirm the cash value can cover the charges.
• Understand the tax rules before you borrow from a policy that might be a MEC.

They do different jobs. A 401(k) and a Roth IRA are retirement accounts, and an IUL is a life insurance policy with a savings feature. If your employer matches 401(k) contributions, that match is usually the first place to look, and an IUL generally makes sense only if you also want permanent life insurance.

An IUL offers a lifetime death benefit, tax-deferred cash value and flexibility, but it costs more than term life, is harder to understand and needs years of funding. Here is the upside:

• A death benefit that can last your whole life if the policy stays in force.
• Index-linked interest with a 0% floor for each crediting period, so an index drop does not reduce the credit.
• Tax-deferred cash value growth, and loans that are generally not taxed on a non-MEC policy that stays in force.
• Flexible premiums and death benefit within limits. Some policies also add living benefit riders for serious illness, which may cost extra.

And here are the downsides to weigh against it:

• Charges continue in down years, and the cost of insurance rises as you age.
• Caps, participation rates and spreads limit your upside and can change.
• Slow early cash value growth and surrender charges make it a poor short-term choice.
• Loans reduce the death benefit, accrue interest and can cause a lapse and a tax bill.
• It is more complex and more expensive than term life insurance, as Texas regulators point out.

An IUL is not an investment account. It is life insurance with a cash value feature, and you should judge it as insurance first. It can be a reasonable fit in some situations and a poor one in others.

An IUL may fit if:

• You need life insurance for your whole life, not just for 20 or 30 years.
• Your budget can fund premiums for many years without strain.
• You have already used employer matches and other retirement accounts and want another tax-advantaged source.
• You understand the caps, charges and loan rules, and you will review the policy every year.

An IUL is probably the wrong fit if:

• You only need coverage for a set number of years, such as while your children are young. Term life costs less.
• You may need the money in the next few years.
• Your income or budget is tight or uncertain.
• You are hoping for stock market returns. Caps limit index credits, and charges reduce cash value.

If you mainly need to protect your income, compare level term prices with our life insurance calculator before you consider permanent coverage.

Regulators treat IUL as a legitimate product but warn that it is complex and that illustrations can look better than real results. The NAIC wrote Actuarial Guideline 49-A to make index-based illustrations more uniform and to limit loan leverage shown in them.

Wisconsin's insurance commissioner issued a consumer alert on universal life policies. It warned that cost of insurance rates can rise, that policyholders should check their coverage every year, and that the office had seen many policies lapse with little or no value. FINRA adds that insurance products can be complex and come with fees.

We agree with the advice they all share: read the guaranteed column, ask what every charge is, and review the policy each year.

Tell us your age, health, budget and goal. A licensed agent will request illustrations, show you the guaranteed and non-guaranteed columns, and say plainly if term life or a retirement account fits better. Approval, price and results depend on your state, the carrier and underwriting, and nothing here is a promise of performance.