Indexed universal life: where it fits and where it does not
Direct Life Advisors is an independent life insurance agency, not an insurance company, and is not affiliated with any insurer mentioned here.
This is life insurance, not a retirement account. Everything below follows from that, and most of the disappointment in this product comes from buyers who were sold the second thing and received the first.
Here is the case for it and the case against it, with the contract terms that decide which one applies to you.
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Where it fits
Indexed universal life does a real job for a specific buyer: someone who needs permanent life insurance for a reason that does not expire, has the cash flow to fund the policy well above its minimum, and will hold it for decades.
The cash value credits interest on a formula tied to a market index, with a floor that limits what a bad year can do and a ceiling that limits what a good one can do. For a buyer who wants permanent coverage and can live with that trade, the structure is coherent.
Where it does not
Funded at the minimum, it is fragile. The cost of the insurance is deducted from the policy every year and rises with the insured person's age. A policy funded at the lowest allowable premium can consume its own cash value in later years and require far larger payments to stay in force — decades after the buyer stopped thinking about it.
The illustration is a projection. The attractive columns in a proposal are built on an assumed crediting rate that is not promised. The guaranteed columns are the contractual floor. Both are in the same document and only one of them is a commitment.
The terms can move. Caps and participation rates are set by the carrier and are frequently adjustable after issue, within contractual limits. A policy bought on today's cap is not guaranteed to keep it.
It is not the right tool for a short need. Coverage that ends when the mortgage ends or the children finish school is a term insurance problem.
The three numbers to ask for
Before signing anything, get these from the contract rather than the brochure: the cap, the floor, and the participation rate. Then ask two follow-ups — which of the three the carrier can change after issue, and what the policy looks like illustrated at the guaranteed minimum rather than the assumed rate.
A proposal that survives being run at its guaranteed floor is a proposal worth considering. One that only works at the assumed rate is telling you something.
A second opinion is free
Most people who search for the drawbacks of this product are holding a proposal from someone else. We will read it with you, name the three numbers, show you the guaranteed column, and tell you plainly whether it matches what you said you wanted.
Talk to someone independent
Direct Life Advisors is an independent agency with 52 carrier relationships. A licensed agent will go through what is already in force and tell you plainly whether you need anything at all — some of these calls end with us saying you do not. At no charge to you. We're paid a commission by the insurance company only if you later buy through us — never by you.