An Indexed Universal Life (IUL) policy functions as both a life insurance policy and a tax-advantaged wealth-building tool. When you pay premiums into an IUL, a portion of that payment goes toward the cost of insurance (COI) to maintain the death benefit, while the remainder is allocated to the cash value of the policy. This cash value earns interest based on the performance of a stock market index, such as the S&P 500, but unlike direct investments, it is not directly tied to the stock market. Instead, the insurer credits interest based on index performance, typically with a cap (maximum return) and a floor (minimum return)—often 0%, ensuring that even in a market downturn, you never lose money due to negative market returns.

Your premium payments go toward both the cost of insurance and a cash value component. The cash value is linked to a market index, such as the S&P 500, but your money is never directly invested in the stock market. The insurer typically applies a cap and a floor to your returns, meaning you get a portion of market gains but are protected from losses. You can take tax-free loans against your accumulated cash value for retirement income, investments, or other financial needs.

One of the defining features of an IUL is its policy loan provision, which allows you to borrow against your cash value tax-free while your funds continue to earn interest. These loans do not trigger taxable events, and because they are secured by your policy, they do not require repayment as long as the policy remains in force. However, any outstanding loans will reduce the eventual death benefit paid to beneficiaries. IULs also offer flexible premiums, meaning you can adjust your contributions over time within certain limits, allowing for scalability based on your financial situation. Additionally, many policies include living benefits that provide access to funds in cases of chronic, critical, or terminal illness.

The long-term success of an IUL depends on proper funding. If overfunded (up to the MEC limit), the policy can maximize cash value accumulation while minimizing insurance costs. However, if underfunded, policy fees could erode the cash value, reducing its effectiveness as a wealth-building tool. Unlike traditional retirement plans such as 401(k)s or IRAs, an IUL has no contribution limits, no required minimum distributions (RMDs), and tax-free access to funds, making it a powerful strategy for financial growth, retirement income, and legacy planning.