Buying Indexed Universal Life Insurance (IUL): How It Works
Indexed universal life (IUL) insurance policies typically pay interest based on the movement of underlying stock and bond indexes.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Updated · 4 min read
Written by
Lead Writer & Content Strategist 
Reviewed by
Life insurance expert 
Edited by
Managing Editor 
Co-written by
Lead Writer & Content Strategist Like standard universal life insurance, indexed universal life (IUL) insurance pays out a death benefit — but its cash value component works differently. The distinguishing feature of indexed universal life insurance is that some or all of its cash value is tied to the performance of a stock or bond index.
IUL policies are highly complex and can come with more ups and downs than many other types of life insurance. For a savvy investor looking for a policy with flexibility, IUL could be a good fit. But if you’re simply looking for permanent coverage with guaranteed growth, a whole life policy is a better option.
Compare Life Insurance Rates.
Get instant quotes from same-day Life Insurance companies and compare now.
What is indexed universal life insurance (IUL)?
Indexed universal life insurance is a type of permanent coverage, which means it can last your entire life and build cash value. Unlike other types of universal life insurance, an IUL policy places the cash value in subaccounts that mirror a stock index, such as the S&P 500.
Similar to other universal life policies, IUL gives policyholders the flexibility to adjust their premiums and death benefit as needed.
🤓 Nerdy Tip
Indexed universal life insurance is complicated, and requires a more hands-on approach to managing the policy. Anyone considering an IUL policy should find a life insurance agent with a Chartered Life Underwriter (CLU) designation to help navigate the buying and management processes. Agents with this certification have a thorough understanding of the industry and life insurance underwriting. Pros of indexed universal life
- Stock market-driven returns. With indexed accounts, the cash value grows when the market grows, and that growth often builds tax-deferred.
- Access to cash value. Once you’ve built up enough cash value, you can withdraw money or take out loans against your IUL policy.
- Control. You can increase or decrease your premium payments and death benefit. However, you may need to complete a medical exam to boost the death benefit.
Con of indexed universal life
- Risk. If the market is experiencing a downturn, your returns could be lower than expected. If that happens, you might have to pay extra money to keep your policy from lapsing. If all you want is a guaranteed payout and the ability to earn some cash value, a whole life insurance policy may be a better option.
- Effort. You’ll need to monitor your policy closely. During periods of low returns, you may need to pay more into your account to prevent your policy from lapsing.
- Capped returns. Caps and participation rates limit you from fully sharing in the success of the market. Plus, they can come down over time, further limiting your returns.
- Fees. Permanent life insurance policies come with more administrative fees because it costs more for the insurer to service them. Your IUL coverage fees can increase over time and may eat into your payments or the value of your cash account.
2024’s top insurers
Shop our rigorously researched Best-Of Awards for the year’s smartest insurance providers.
2024’s top insurers
Shop our rigorously researched Best-Of Awards for the year’s smartest insurance providers.
Our Nerds’ top insurers
Shop our rigorously researched Best-Of Awards for the year’s smartest insurance providers.
Our Nerds’ top insurers
Shop our rigorously researched Best-Of Awards for the year’s smartest insurance providers.
How indexed universal life insurance works
IUL works similarly to universal life. You pay a premium in exchange for potentially lifelong coverage and the opportunity to build cash value over time. Part of your premium payment goes toward the cost of insurance — i.e., paying out the death benefit — and other fees. The rest is added to your cash value.
The cash value of IUL can grow based on the performance of a stock market index, so it might rise more quickly than other life insurance options — but can also be riskier and harder to manage.
As with universal life, IUL premiums are adjustable. If you ever decide to skip a premium payment or underpay, the cost of insurance and policy expenses are deducted from your cash value. You may also be able to adjust the death benefit amount if your needs change. However, know you might need to take a life insurance medical exam if you apply to increase your policy’s payout.
Account options
You can choose to put the cash value in IUL insurance policies in a fixed account, indexed account or a combination of both.
- Fixed accounts: Growth happens at a fixed rate set by the insurer.
- Indexed accounts: Growth is tied to the performance of a stock or bond index, such as the S&P 500. Your insurer will present you with a portfolio of accounts to invest in.
How returns are credited
The amount you can earn in an indexed account is subject to “floors," “caps” and "participation rates" to help minimize large swings in interest payments:
Floor
The lowest your account rate can go, often set at 0% so your account won't suffer losses.
The floor is usually guaranteed for the life of the policy.
Cap
The highest your account rate can go. If the market is up more than the cap, you'll earn the cap rate.
The cap can change while your policy is in force.
Participation rate
Dictates what percentage of the market index's gains are credited to the policy. A participation rate below 100% will further limit the interest you can earn.
Caps and participation rate examples
The examples below show how participation rates and market conditions impact IUL policy earnings.
| Market index gain | Limitations | Final interest credited |
|---|---|---|
| +12% | Cap: 10% Floor: 0% Participation rate: 100% | +10% |
| +12% | Cap: 10% Floor: 0% Participation rate: 80% | +8% |
| -5% | Cap: 10% Floor: 0% Participation rate: 100% | 0% |
Did you know...
There are several methods insurers use to calculate gains in indexed universal life policies, such as the Daily Average method, the Monthly Point-to-Point method and the Annual Point-to-Point method. Methods vary among policies and insurers. Be sure to carefully review the information provided and then double-check your understanding with your agent about the method used. The cost of indexed universal life insurance
The exact cost of your IUL policy will depend on factors such as your age, health, smoking status and coverage amount. Below are average annual premiums for a $500,000 IUL policy for non-smokers in excellent health.
| Issue age | Men | Women |
|---|---|---|
| 20 | $1,006 | $872 |
| 30 | $1,431 | $1,203 |
| 40 | $2,163 | $1,865 |
| 50 | $3,688 | $3,283 |
| 60 | $6,605 | $5,784 |
| Source: LifeStein.com. Lowest three rates for each age averaged. Data valid as of February 26, 2026 and rates are subject to change. | ||
Indexed universal life vs. whole life insurance
| Feature | Whole life | Indexed universal life |
|---|---|---|
| How long policies last | Lifetime. | Lifetime. |
| How cash value earnings are calculated | Fixed rate. | Stock and bond indexes, as well as fixed interest rate options. |
| Flexible premiums and death benefit | No. | Yes. |
| Cash account value can decline | No. | Yes, if growth is low, fees are high and you pay minimum or no premiums. |
| Cost | Generally more expensive. | Generally less expensive. |
Indexed universal life vs. universal life insurance
| Feature | Universal life | Indexed universal life |
|---|---|---|
| How long policies last | Lifetime. | Lifetime. |
| How cash value earnings are calculated | Rate set by your insurer (which may change frequently). | Stock and bond indexes, as well as fixed interest rate options. |
| Flexible premiums and death benefit | Yes. | Yes. |
| Cash account value can decline | Yes, if growth is low, fees are high and you pay minimum or no premiums. | Yes, if growth is low, fees are high and you pay minimum or no premiums. |
| Cost | Generally less expensive. | Generally more expensive. |
Indexed universal life vs. term life insurance
| Feature | Term life | Indexed universal life |
|---|---|---|
| How long policies last | The length of the policy term, such as 10, 20 or 30 years. | Lifetime. |
| How cash value earnings are calculated | No cash value. | Stock and bond indexes, as well as fixed interest rate options. |
| Flexible premiums and death benefit | Premiums and death benefit are usually fixed. | Yes. |
| Cash account value can decline | No cash value. | Yes, if growth is low, fees are high and you pay minimum or no premiums. |
| Cost | Significantly less expensive. | Significantly more expensive. |
What are IUL policy illustrations?
When you sit down to discuss IUL options with an agent, you’ll be shown “illustrations.” These are projections of the policy’s cash value growth, based on predicted interest rates, fees, payments, caps, participation rates and loans.
It’s easy to see these as accurate forecasts of the future, but they are not — they’re estimates. After all, no one knows for certain how the stock and bond markets are going to perform or what adjustments the insurance company will make.
🤓 Nerdy Tip
When considering an indexed universal life policy, make sure to ask how the interest rates, fees, caps, participation rates or premiums could affect your policy’s performance. The bottom line: Is IUL right for you?
You may want to consider indexed universal life insurance if:
- You want life insurance coverage that can last your whole life.
- You’re willing to monitor the policy closely and accept some risk to earn more interest for your cash value.
- You feel comfortable that you’ll be able to pay the policy premiums over the long term.
- You’ve already put the maximum amount into other tax-advantaged investment accounts, like your 401(k).
Companies that offer IUL insurance
All of the companies below offer indexed universal life insurance and earned at least 4 stars out of 5 for overall performance.
| Company | NerdWallet rating |
|---|---|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Frequently Asked Questions
What is indexed whole life insurance?
Indexed whole life insurance isn’t an actual policy. You might be thinking of indexed universal life insurance. With this type of life insurance, the interest rate at which the cash value grows is linked to the performance of a stock index, such as the S&P 500. While your policy won’t lose value if the stock market doesn’t perform well, annual returns will be capped, so you won’t be able to take full advantage of a strong market either.
What are the differences between whole life and indexed universal life insurance?
There are key differences between these permanent policies. The cash value within a whole life insurance policy grows at a fixed rate, meaning the annual returns are guaranteed and predictable. With indexed universal life insurance, the cash value interest rate is typically tied to the performance of a stock index, so returns might fluctuate. IUL policies also offer flexible death benefits and premiums; whole life policies don't.
How can I buy indexed universal life insurance?
You can purchase an IUL policy online, through a life insurance agent or directly from an insurer. Check out the best life insurance companies as a starting point, and be sure to compare quotes from multiple insurers to get the coverage you need at the best possible price.
Should I invest money in my 401(k) or an indexed universal life insurance policy?
For the purposes of retirement savings, it is important to prioritize your 401(k) or IRA, especially if your employer offers matching contributions. Buying an indexed universal life policy should only be done in consultation with a life insurance professional and when you’ve put the maximum amount in other types of tax-advantaged accounts.
Is indexed universal life insurance worth it?
Indexed universal life insurance can be worth it for some wealthy individuals and experienced investors, but it comes with increased risk and requires careful attention to managing the policy. If you want lifelong coverage that builds cash value and has a guaranteed death benefit, whole life insurance may be a better fit. Term life insurance is the most affordable choice and provides suitable coverage for most people.
Article sources
NerdWallet writers are subject matter authorities who use primary,
trustworthy sources to inform their work, including peer-reviewed
studies, government websites, academic research and interviews with
industry experts. All content is fact-checked for accuracy, timeliness
and relevance. You can learn more about NerdWallet's high
standards for journalism by reading our
editorial guidelines.
Methodology
How we rate the best life insurance companies
✅ 445 life insurers reviewed
📝 210 policies assessed
🔢 1,515 data points analyzed
📊 Star rating categories
When NerdWallet evaluates life insurance companies, our editorial team considers the insurer's strengths and weaknesses, as well as the things that matter most to customers buying a long-term financial product. We then weigh these factors carefully:
💰 Financial strength (35%). We use AM Best ratings to confirm an insurer’s financial stability and ability to pay claims far into the future. The top life insurance companies have an exceptional financial strength rating of A+ or A++ (Superior).
🗣️ Consumer complaints (35%). Our top-rated life insurance companies have fewer than the expected number of complaints to state regulators over a three-year period, according to the National Association of Insurance Commissioners — so you can expect a smoother customer experience.
☎️ Consumer experience (20%). Insurers who allow consumers to contact them by email, phone and live chat earn the highest scores. The same goes for insurers who support online quotes, beneficiary changes and claims.
👀 Transparency (10%). Our methodology gives higher scores to transparent insurers who clearly display information about their policy options, coverage amounts and term lengths (if applicable) on their site.
⭐ What our star ratings mean
Companies with 5 stars are exceptional, with strong financials, diverse policy lineups and great reputations for customer service.
Companies with 4.5 stars are excellent, with solid financials and policy offerings, and good customer service track records.
Companies with 4.0 stars are good, and potentially great for people looking for niche coverage options.
Companies with 3.5 stars or fewer could do better in certain categories, like financial strength and customer complaints.
NerdWallet does not receive compensation for our star ratings or our reviews. Read more about our life insurance ratings methodology and editorial guidelines.
On this page
- What is indexed universal life insurance?
- Pros of IUL
- Cons of IUL
- How IUL works
- Cost of IUL
- IUL vs. whole life insurance
- IUL vs. universal life insurance
- IUL vs. term life insurance
- What are IUL policy illustrations?
- Is IUL right for you?
- Companies that offer IUL
- How we rate the best life insurance companies
