Some offers on this page are from advertisers who pay us, which may affect which products we write about, but not our recommendations. See our Advertiser Disclosure . Indexed universal life insurance (IUL): Risks, costs, and how it works Cassidy Horton Contributing Writer Wed, August 19, 2026 at 8:50 AM PDT 6 min read Depending on who you ask, indexed universal life (IUL) insurance is either a powerful wealth-building strategy or an overly complicated insurance product that promises more than it delivers. However, the truth could lie somewhere in the middle. An IUL is first and foremost a life insurance policy. Like other permanent life insurance products, it can provide lifelong coverage and build cash value over time. But what makes it different is how that cash value grows. Instead of earning a fixed interest rate, it's tied to the performance of a stock market index, such as the S&P 500. Here's how indexed universal life insurance works, who it may be a good fit for, and what to know before buying a policy. What is indexed universal life insurance? Indexed universal life insurance is a type of permanent life insurance that combines a death benefit with a cash value account. As long as the policy stays in force, your beneficiaries receive a death benefit when you die, and part of the premiums you pay has the potential to grow inside the policy over time. Unlike whole life insurance, which credits your cash value at a fixed interest rate, an IUL ties your cash value growth to the performance of a market index, such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq Composite (hence the "indexed" part of the name). Every premium payment you make for a UIL policy is generally split three ways: Part of your premium What it pays for Cost of insurance Funds your life insurance coverage and death benefit Policy fees and expenses Covers administrative costs and other charges Cash value Accumulates over time and earns interest based on your policy's crediting method As with all cash value life insurance, you may be able to borrow against your balance, withdraw funds, or even use it to help cover future premiums. However, loans and withdrawals can reduce your death benefit and, if not managed carefully, may lead to your policy lapsing. How indexed universal life insurance builds cash value The biggest difference between an indexed universal life policy and other permanent life insurance policies is how the cash value earns interest. With whole life insurance, you earn a fixed interest rate on the cash value portion of your balance. With an IUL policy, the interest you receive is tied to the performance of a stock market index. That said, your money isn't actually invested in the stock market. Instead, the insurance company uses the index as a benchmark to determine how much interest to credit to the cash value portion of your policy. If the index performs well, your cash value may earn...
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