As you try to figure out retirement strategies, you might have found out about Indexed Universal Life Insurance policies (IUL).

We’ll break down everything you need to know about investing in IUL policies for retirement savings.

What is an IUL – Indexed Univesal Life Insurance?

IUL is a permanent life insurance that lasts your entire life. It allows you to build cash value faster and safer than other types of permanent life policies. The cash value reflects the performance of the market indexes which include the S&P500, the Dow Jones, or Nasdaq.

You’re not investing directly in the market, but the interest rate you earn is to tied to market performance.

How does an IUL Policy Work?

Index Universal Life Insurance (IUL) offers both a death benefit & a cash value account.

The way interest is credited to an IUL policy provide the upside potential for a higher return without the downside risk. For example. in years the underlying index performs positively, your account will be credited with that return, up to a particular cap rate.

So for example, if your policy has a cap of 14%, and the underlying index has a return of 15% in a given year, your cash value would be credited with 14%. However, in years where the underlying index is losing money, your cash value account will simply be credited with 0% retrun.

What that means is that your cash value is protected and at the same time allowing you to build cash value … without having to make up for any losses.

The funds that are inside of your cash value account are allowed to to grow on a tax-deferred basis. This means that are NO TAXES due unless or until the money is withdrawn. This provides your cash value account to grow and compound over time.

You have the OPTION to take the cash value as TAX FREE INCOME at any age.

Taking Money Out of the Cash Value in an Indexed Universal Life Policy

After you’ve build enough cash value in the account, you can withdraw it to pay off your mortgage, invest in real estate, help pay for college, or SUPPLEMENT YOUR RETIREMENT INCOME.

An advantage to an IUL Policy is that you don’t have to be 59 1/2 to start withdrawing the money which is typical for 401K and IRA’s.

You can withdraw money from an IUL Policy at almost any time as long as the cash value account is positive. If you ultimate goal is to have Retirement Income, than we recommend you wait to take out money until you retire so the cash value continues to grow.

What is an Increasing Death Benefit in IUL Policy?

A policy with a goal of supplementing retirement income from the cash value accounts is normally designed with increasing death benefit. This allows the maximum amount of premium to be invested in the cash value account in the early years of the policy.

Premiums are usually allocated into 3 buckets

  • Pure Cost of Insurance which is to pay the death benefit
  • Cash Value Account
  • Administration Fees

The other option is to design an universal life insurance policy with a level death benefit, which means that the death benefit is always the same.

This design is suitable for people who care for both a decent amount of death benefits for their beneficiaries if they pass away young and supplemental retirement income.

Withdrawing From and Loans Against the Cash Value Account of Indexed Universal Life Insurance Policy

Sarah has the option to take one of two type of loans:

  • Traditional Loan – they are charged interest at the adjustable loan rate
  • Indexed Loan – they are charged at set rate as stated in the illustration.

Sarah has chosen a traditional loan option.

When Sarah starts to take cash withdrawals at age 60, she won’t have to pay income taxes on the cash distribution. Another plus is that money from your cash value won’t affect your income tax bracket. This is the biggest advantage of an Indexed Universal Life Insurance policy over other retirement savings options and also one of the biggest tax benefits in the tax code according to Ed Slott a tax expert.

When combined with Social Security and other retirement accounts, a properly structured IUL policy is a great way to supplement your retirement income.

Pros and Cons of Indexed Universal Life Insurance


  • Less Expensive than Whole Life Insurance
  • Lower Risk than investing in Stocks
  • Much safer option in bear market conditions compare to investing in stock or variable universal life insurance
  • Tax Free Cash Out from the policy in retirement
  • Tax Free Death Benefit for beneficiaries


  • In a bull market year, IUL might pay lower returns than other investment accounts
  • No opportunity to outperform the market
  • No dividents

Who is Indexed Universal Life Insurance Policy for?

If you are looking to supplement your retirement income with tax free money or a death benefit to pay onto your heirs, an IUL may be right for you.

An IUL Policy policy offers many tax advantages, with less risk than stocks or other investments.