5 questions to ask before buying an IUL

Indexed universal life, or IUL, can offer lifelong coverage and cash value with interest tied to a market index. Before buying an IUL, it helps to know it has more moving parts than many other policies.

The NAIC's simple rule applies here: don't buy a policy you don't understand. Here are five questions we think every family should ask.

Before buying an IUL: your goals and budget

1. What do I want this policy to do?

An IUL is life insurance first. Its main job is to provide a death benefit for the people you love.

Some people also want cash value they may be able to use later. Be clear about which goal matters most, since that shapes how the policy should be designed.

If you only need coverage for a set number of years, term life usually costs less. Our guide to term vs. whole life explains the trade-offs.

2. Can I fund it well for the long run?

IULs have flexible premiums. That can be helpful, but it also means the policy depends on you putting enough money in.

If premiums and interest don't keep up with the charges, the cash value goes down. If it keeps falling, the policy can lapse unless you pay more or lower the death benefit.

Ask yourself:

• Is this premium comfortable for my budget, even in a tough year?
• What is the least I can pay and still keep the policy in force?
• What happens if I need to pay less for a while?

Questions about costs and projections

3. What are all the fees and charges?

IULs have costs that are taken out of the cash value over time. These often include:

• Cost of insurance charges
• Expense charges and policy fees
• Surrender penalties if you drop the policy in the early years

The floor on an IUL applies to index crediting only. These charges can still lower your cash value, even in a year when crediting is 0%, as we explain in how IUL caps and floors work.

4. How does the illustration hold up with lower assumptions?

An illustration is a projection of how a policy might perform. It's an estimate, not a forecast.

Illustrations show what the company guarantees and how the nonguaranteed parts might play out. Ask to see the policy run at a lower crediting rate, for example a few points below the illustrated rate.

Also ask what the cap, floor and participation rate are today, and which ones the insurer can change. Caps, for example, can change while the policy is in force.

Questions about using the cash value

5. How do loans and withdrawals work?

Many people buy an IUL planning to use the cash value later. That's why it pays to understand loans before you need them.

Any unpaid loan, plus interest, is subtracted from the death benefit. Large loans can also make it harder for the cash value to cover the policy's costs.

Loans and withdrawals may be tax-advantaged, but that depends on how the policy is set up and kept in force. If a policy lapses while a loan is still owed, it can create a tax bill even though you receive no cash.

You can learn more about this coverage on our indexed universal life page.

Common questions

Can an IUL policy lapse?

Yes. If the cash value can't cover the policy's charges, coverage can end unless you add money or lower the death benefit.

Are IUL illustrations guaranteed?

No. Only the guaranteed values in an illustration are promised, and the rest depends on future crediting, charges and how you fund the policy.

Bottom line

An IUL can be a useful tool for some families, but it works best when it's designed with clear goals and funded well. Fees, funding and loans all play a big part in how it performs.

Asking these five questions can help you see the full picture. If something isn't clear, keep asking until it is.

Have questions about your situation? Book a complimentary call with our team.

This article is for general education only and isn't financial, tax or legal advice. Product features vary by carrier and state. Talk with a licensed professional about your situation.