Are Indexed Universal Life Insurance Policies Worth It? A Financial Coach’s Honest Take
In the world of financial coaching, few topics spark as much debate—and confusion—as Indexed Universal Life Insurance (IUL). It’s often pitched as a “miracle” product that can grow your money, protect your family, and help you retire tax-free.
But is it really all that?
As a financial coach who’s walked alongside many clients—from young professionals trying to get out of debt to high-income earners building generational wealth—my answer is this:
IULs can make sense, but only for a specific type of person with a specific type of financial situation.
Let’s break down when an IUL is helpful, when it’s not, and what you—as a smart, intentional money steward—should consider before signing that policy.
What Is an IUL?
An Indexed Universal Life Insurance policy is a type of permanent life insurance. It comes with two major features:
- Lifelong death benefit – as long as you pay the premiums.
- Cash value component – grows based on a stock market index (like the S&P 500), but with a cap and floor.
For example, if the S&P 500 earns 12%, your IUL might credit you 9%. If the market tanks and loses 10%, your policy might credit you 0%—protecting you from loss, but also limiting your gains.
It also offers tax-deferred growth and the ability to withdraw funds tax-free via policy loans.
Sounds great, right?
Well, it depends.
When IULs Can Make Financial Sense
1. You’re a High-Income Earner with Limited Tax Shelters
If you're maxing out your 401(k), Roth IRA, and HSA, and still have extra money to invest, an IUL can offer another bucket with tax advantages.
You can:
- Grow money tax-deferred
- Borrow against your policy tax-free
- Leave behind a tax-free death benefit
2. You Need Permanent Life Insurance
Unlike term insurance, which expires after 10–30 years, IULs offer coverage for life. This is critical for:
- People with lifelong dependents (special needs children, for example)
- Business owners with succession plans
- High-net-worth individuals handling estate taxes
3. You Have Consistent, Strong Cash Flow
IULs work best when heavily and consistently funded over many years—often 10–20+. If you can commit long-term, an IUL can offer a flexible, tax-friendly supplement to your retirement strategy.
When IULs Do Not Make Financial Sense
1. You’re Living Paycheck to Paycheck
Let’s be honest—most people need to build an emergency fund, pay off debt, and invest in Roth IRAs or employer-sponsored plans first. These offer higher liquidity, lower fees, and more flexibility than IULs.
2. You Expect High Returns
An IUL isn’t a stock market investment. You’ll be capped—often around 8–10%—and the internal costs (insurance, admin, etc.) can erode your gains.
It’s a conservative tool, not a growth engine.
3. You Don’t Fully Understand the Product
IULs are complex. They come with:
- Cap rates
- Participation rates
- Cost of insurance charges
- Surrender periods
- Loan interest terms
If you don’t understand what you’re buying, you could overfund a bad policy or underfund a good one and lose your investment.
A Real-Life Example
Let’s take James, a 45-year-old dentist earning $300,000 annually. He’s maxed out his 401(k) and Roth IRA, has $100,000 in savings, and wants a tax-free way to supplement retirement while leaving a legacy.
His financial coach helps him set up a max-funded IUL, keeping the death benefit low to minimize costs and maximize cash value growth. He commits to contributing $20,000 per year for 15 years.
In retirement, James borrows against his cash value tax-free, while keeping a permanent death benefit in place for his family.
In his case? The IUL makes sense.
A Financial Coach’s Bottom Line
At Lionhood Financial Coaching, we don’t push products—we promote principles.
That’s why IULs should never be your first wealth-building strategy. They come after:
- You’re debt-free (excluding a mortgage)
- You’ve built an emergency fund
- You’re investing consistently in tax-advantaged, low-cost vehicles
- You have clarity on your goals, risk tolerance, and retirement timeline
Next Steps Before Getting an IUL
If you’re considering an IUL:
- Get a full financial assessment first.
- Compare it with other tools like Roth IRAs, brokerage accounts, or term + invest-the-difference strategies.
- Work with a coach or fiduciary advisor who understands both insurance and investing.
- Request illustrations and review the cap rates, fees, surrender periods, and break-even point.
Final Word
IULs aren’t inherently good or bad—they’re tools. The key is using the right tool for the right job. For some, it can be a smart piece of a larger strategy. For most, simpler, more transparent options yield better long-term results.
If you want a second opinion on whether an IUL fits your situation, schedule a clarity session with a financial coach who puts your goals first—not a commission.