Short answer: Indexed universal life (IUL) is permanent life insurance with a cash value account. Instead of earning a fixed rate, the cash value is credited interest based on how a market index (like the S&P 500) performs, with a cap on the upside and a floor that protects against losses from index declines. Your money is not invested directly in the market.
The two parts of an IUL
1. The death benefit. Like any life insurance, it pays your beneficiaries a tax-free amount when you pass away, as long as the policy stays in force.
2. The cash value. Part of each premium, after the cost of insurance and policy charges, goes into a cash value account that can grow over time.
How index crediting works
Every crediting period (often one year), the carrier looks at the index's change and credits interest using a few levers:
- Cap: the maximum rate you can be credited. If the cap is 10% and the index gains 18%, you're credited 10%.
- Floor: the minimum, often 0%. If the index drops 20%, you're credited 0%, not a loss from the index.
- Participation rate: the share of the index gain that counts. At 100%, you get the full gain up to the cap.
Dividends paid by companies in the index usually aren't included. Caps and participation rates are set by the carrier and can change.
What it costs
A 0% floor doesn't mean your cash value can never go down. Every month the policy deducts the cost of insurance and fees. In a 0% year, those charges still come out. That's why how the policy is funded matters so much.
Using the cash value
You can borrow against the cash value through policy loans, often used later in life as a supplement to retirement income. Loans accrue interest and reduce the death benefit. If loans grow too large, the policy can lapse, which can create a tax bill.
Who IUL tends to fit
- People who need lifelong coverage and want the potential for cash value growth
- Those who can fund the policy consistently, often above the minimum
- Families who have already covered the basics, like an emergency fund and enough term coverage
Who should be careful
If your main goal is the most coverage for the lowest cost, term life usually wins. And anyone promised "market returns with no risk" should ask to see a full illustration, including the guaranteed column.
Have a question before you call?
Start with Jarvis, a free AI concierge open to the general public, and get answers in plain English. You can ask how caps, floors and policy loans work, any time of day, right from your phone. When you're ready, a licensed Moving Mountains advisor takes it from there. Prefer a person right away? Call (813) 739-9877.
