Common myths and misconceptions about IUL

Indexed universal life insurance offers a unique blend of death benefit protection and cash value accumulation tied to the performance of a stock market index. However, as with other types of life insurance, there are several misconceptions that can hinder an agent’s ability to effectively sell IUL.

Here are seven of the most common misconceptions and why understanding them is essential to ensuring client satisfaction and maximizing your sales and income potential.

1. IUL is a "set it and forget it" product.

We definitely hear this from clients. Unfortunately, that isn’t the case.

Unlike term life insurance or even some permanent life insurance products such as guaranteed universal life, IUL insurance contains a cash value account which, not surprisingly, requires ongoing attention.

For example, premiums should be monitored to ensure the policy is properly funded, especially in the early years when cash value accumulation might be slow. Also, if an IUL policy is underfunded or if the chosen index doesn’t perform as expected, the policyholder could risk a lapsed policy or reduced death benefit depending how it was illustrated. However, there are potential stop-gaps agents can use to minimize risk, such as catch-up riders that can allow policyholders to catch up during a defined no-lapse protection time frame.

Also important, many IULs have flexible premium schedules, which means clients can adjust their contributions as needed. As an agent, you must stay on top of this to ensure there is no negative impact on the policy’s overall performance.

To ensure your client’s loved one’s needs are met, an IUL should be reviewed on an annual basis to ensure it is meeting your client’s financial goals. Being clear with clients about the long-term maintenance involved in IULs will help build trust and ensure the policy stays aligned with their needs.

2. IULs offer unlimited market upside potential.

False.

Although IULs do allow clients to participate in the growth of a stock market index or index fund, they are not a ticket to unlimited returns. IULs come with caps on the maximum return. This means that even if the market performs well, the policyholder will see only a portion of the upside allocated to their cash value. And then there are participation rates controlled by the insurance company, which can further limit growth. A 70% participation rate means the policyholder gets 70% of the index's gain within the parameters of the policy.

An important reason returns are capped is because IULs offer downside protection (a floor, typically 0% or 1%). Clients won’t lose money in a year when the index is down.

Of all the twists and turns in an IUL policy, managing this expectation may be the most important for agents. Similar to fixed indexed annuities, customers often forget the architecture of their plan when they see record years of stock market performance that don’t translate to the growth of their policy’s cash value. This is why life insurance should never be sold as a good investment; it’s an insurance product at its core that has components that allow it to be a cash accumulation vehicle.

3. IULs have guaranteed cash value growth.

Unlike whole life insurance policies, which offer guaranteed cash value growth, IULs have no guaranteed growth. The cash value in an IUL depends on the performance of the chosen index. While there’s usually a floor to protect against market losses, cash value growth is not guaranteed. In years of market volatility when the index performs poorly, the policyholder may see minimal or no growth in their cash value.

Agents should set realistic expectations about growth and emphasize that cash value accumulation takes time.

4. IULs are only for wealthy clients.

This is far from the truth.

IULs have features that are often associated with financial planning for affluent clients, such as premium flexibility and potential for tax-deferred growth. However, IULs can be customized to fit perfectly with the needs of other income segments.

Middle-income clients love the idea of flexible premium payments that adjust to their financial situation over time. IULs also provide death benefit protection and the opportunity to accumulate cash value that can be used for future needs such as college funding or tax-free retirement income.

For financial professionals, understanding how to structure the policy to fit the client’s budget is key to helping more clients benefit from this type of life insurance coverage.

5. IULS are a quick and easy way to build cash value.

IULs are definitely a good option for cash value growth, but they are not designed for quick wealth accumulation. The cash value in an IUL policy grows gradually over time, particularly in the early years when a significant portion of premiums may go toward policy charges (e.g. the cost of insurance) and fees.

The index-linked growth often takes a few years to become meaningful. Additionally, if the policy isn’t funded properly or if there are high expenses, the cash value may grow slower than anticipated.

Agents must emphasize the long view when it comes to IULs and clearly paint the picture when explaining the IUL illustration.

6. Growth in an IUL is tax-free.

One of the key benefits of an IUL is tax-deferred (not tax-free) growth.

This allows the policy's cash value to grow without immediate taxation. Unlike mutual funds or a typical savings account, which may generate taxable gains or interest, IUL policies provide a tax-efficient way to accumulate wealth. When properly structured, clients can access the cash value through policy loans, enjoying liquidity without triggering immediate tax liabilities. However, what clients often misunderstand are the potential risks, such as surrender charges or the impact of lapsing policies.

Like whole life insurance and other permanent life policies, the death benefit paid to beneficiaries of an IUL policy is generally tax-free. However, agents must ensure clients understand that poor policy management, such as overfunding or lapsing, could lead to consequences. For instance, overfunding can cause a policy to become a modified endowment contract, which loses the tax advantages of accessing cash.

The tax-free nature of proceeds from a life insurance policy comes from IRS code 7702 which has guidelines that must be met.

7. IULs should replace retirement accounts.

This is vastly incorrect.

Some agents leverage the equity-indexed nature of IUL policies to highlight a “potential for higher returns” compared to other retirement accounts such as a Roth IRA or savings account. This is simply incorrect.

Just like a Roth IRA or savings account, an IUL should serve as a single component of a long-term retirement strategy when it fits within a broader financial plan. It should never be primarily positioned as a replacement for an existing retirement account solution.

Yes, clients can benefit from market returns while being shielded from market downturns through guaranteed minimum interest rates, making it “lower risk” than other types of traditional retirement vehicles. But it is in no way a replacement.

IULs are a long-term play, and making sure clients understand this will go a long way to ensuring you keep your clients for a long time.

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Drew Gurley is a licensed life insurance expert with nearly 15 years of experience. During his career as both a licensed life insurance agent and industry executive he has helped thousands of clients with their life insurance needs through his work at Redbird Advisors and Senior Market Advisors.