Is IUL a Scam? What Indexed Universal Life Illustrations Do Not Show

What IUL is, and how it is usually pitched

Indexed universal life (IUL) is permanent life insurance with a cash value account. Each year the insurer credits interest to that account based partly on a stock index, such as the S&P 500, subject to a cap, a participation rate and a floor, usually 0%. You do not own the index or any stocks.

The pitch often sounds like this: market upside with no downside, tax-free retirement income, and a death benefit for your family. Parts of that are true. But the contract is a life insurance policy first. The illustration rules written by the National Association of Insurance Commissioners (NAIC) say an insurer or its producers may not "represent the policy as anything other than a life insurance policy" (NAIC Life Insurance Illustrations Model Regulation 582, section 6, checked October 14, 2026).

So is IUL a scam? No. It is a legal product sold under state insurance law. The real questions are whether it fits your goal, and whether the numbers you were shown are realistic.

Where the money goes: the costs inside the policy

Every premium dollar passes through charges before it earns anything. Universal life policies commonly have a premium load (a percentage taken off each payment), a monthly policy fee, per-thousand charges in the early years, rider charges, and the cost of insurance, which pays for the death benefit. Surrender charges apply if you cancel in the early years. Ask for each one in writing, in dollars and as a percentage.

The cost of insurance is the charge that grows. It depends on your age and the amount of insurance at risk. On the 2017 Commissioners Standard Ordinary (CSO) mortality table, the yearly death rate for a nonsmoking man is 7.96 per 1,000 at age 65, 24.24 at 75 and 82.34 at 85 (Society of Actuaries, 2017 Loaded CSO table 3291, checked October 14, 2026). That is about 3 times the age-65 rate by 75 and 10 times by 85. If the cash value stops growing fast enough, these charges can drain it.

These costs are why cash value builds slowly. Our research on the cash value hockey stick shows the early years are mostly flat, and many owners leave during those years.

Caps, participation rates and the 0% floor

The cap is the most the account can be credited in a period. The participation rate is the share of the index gain you get. In most policies these are non-guaranteed elements, which Model Regulation 582 defines as premiums, benefits, values, credits or charges "that are not guaranteed or not determined at issue" (NAIC Model 582, section 4, checked October 14, 2026). The insurer can lower them after you buy, usually down to a guaranteed minimum written in the contract. Ask for that minimum, not just today's numbers.

The 0% floor protects the index credit, not the account. In a year when the index is flat or down, you are credited 0%, and the policy still deducts its charges. If the account holds $100,000 and that year's charges are $3,000 (hypothetical), a 0% year leaves $97,000. The floor did its job, and the account still fell 3%.

Many illustrations also show multipliers or bonuses that boost the index credit. These are usually paid for with added charges. NAIC Actuarial Guideline 49-A (AG 49-A) limits how much a multiplier can raise the illustrated rate, and a 2023 revision tightened that limit for policies sold on or after May 1, 2023 (NAIC AG 49-A, section 4.C, revised December 11, 2025).

Policy loans, lapse and the tax bill

The tax-free retirement income in most IUL pitches is not a withdrawal. It is a loan from the insurer, with your cash value as collateral. Loans from a life insurance policy that is not a modified endowment contract (MEC) are generally not taxed while the policy stays in force (Internal Revenue Code section 72(e)(5), checked October 14, 2026).

A policy becomes a MEC if you pay in more than the 7-pay limit during the first 7 contract years (Internal Revenue Code section 7702A(b), checked October 14, 2026). Loans from a MEC are treated as taxable distributions, and taxable amounts taken before age 59 and a half can carry an extra 10% tax (Internal Revenue Code sections 72(e)(10) and 72(v), checked October 14, 2026).

The bigger risk is a lapse with a loan outstanding. Loan interest is charged every year. If the loan grows past the cash value, the policy ends, the cash value pays off the loan, and the gain over what you paid in can become taxable ordinary income, even though you receive no check. A federal appeals court upheld exactly that result in Brown v. Commissioner (U.S. Court of Appeals for the Seventh Circuit, September 11, 2012). The IRS rule for surrendered policies works the same way: income is the amount above your cost in the policy (IRS Publication 525, checked October 14, 2026). Check with a tax professional before taking loans.

When IUL can make sense

IUL can be a reasonable fit when all of these are true:

• You need a death benefit that lasts for life, for example for estate costs, a heir with special needs, or a business agreement.
• You already fund lower-cost options such as a 401(k), an individual retirement account (IRA) or a health savings account (HSA).
• You can pay well above the minimum premium for many years and expect to keep the policy 15 to 20 years or longer.
• You accept modest, uncertain credits and will read the annual statement each year.

For someone near retirement who mainly wants growth or income, the slow build-up and rising cost of insurance are hard to overcome. Our hockey stick research found that buying cash value at 65 rarely works on the numbers.

How to check the policy and the person selling it

Look up the insurer through the NAIC Consumer Insurance Search, and check the salesperson's license and any complaints with your state insurance department. Ask for every page of the illustration, including the guaranteed columns and the side-by-side lower-rate ledger that AG 49-A requires (section 7). Read the free-look notice on the policy: state law gives you a window to return it for a refund. If you feel rushed, or answers will not come in writing, a fee-only fiduciary or a tax professional can review the illustration. Our guide to IUL illustration red flags walks through the pages line by line.

A plain example: illustrated rate vs actual crediting

Hypothetical: a buyer pays $25,000 a year into an IUL for 20 years ($500,000 in total). We assume a 7% premium load and other charges of $3,000 in year 1, rising 5% a year (about $99,200 over 20 years). These are round, made-up numbers, not any company's policy. Only the average crediting rate changes.

The arithmetic each year: take last year's value, add the premium after the 7% load ($23,250), subtract that year's charges, then credit the rate. At 0% the result is simply $500,000 paid in, minus $35,000 of loads and about $99,198 of charges: $365,802.

One point lower than illustrated cost about $82,000 here. Real policies also have surrender charges and costs that rise faster with age, so the gap can keep widening after year 20.

Sources

The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.