Whole Life Insurance and Indexed Universal Life Insurance: Comparing the Features

What is indexed universal life insurance? 

Indexed universal life (IUL) is a form of permanent life insurance that falls under the umbrella of universal life (UL) insurance. UL insurance is also a type of permanent life insurance that covers the insured for life (as long as premiums are paid), includes a death benefit and features a cash value component. 

However, their big difference is that UL's cash value grows at a set interest rate, while IUL's varies based on how a chosen stock market index performs. 

The way cash value grows in IUL policies is also a key differentiator from whole life policies, as is how premiums are handled. Here's a closer look at how IUL insurance works, and what makes it unique. 

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How it works 

Indexed universal life (IUL) combines flexible premiums with cash value growth linked to an external stock market index, such as the S&P 500.¹ That means: 

• Premiums are flexible. Policyholders can adjust payments up or down within certain limits. 

• The death benefit can be modified to reflect changing coverage needs. 

• Policies typically include a floor to protect against declines in the market index. 

• Growth potential is capped, limiting gains when the underlying market index rises. 

Why people choose it 

People are drawn to IUL for its balance of growth potential and flexibility. These plans: 

• Can offer higher growth potential if the underlying stock market index performs well. 

• Have a cash value that may grow faster than in fixed-rate policies. 

• Have the flexibility to adjust premiums, which can help during tight budget years. 

However, reducing or skipping premiums too often can cause the policy to lapse if the cash value can’t cover insurance costs.