Indexed Universal Life: Tax-Free Promise or Costly Illusion?

After a year of increasing controversy, indexed universal life insurance sits at a highly debated crossroads in the financial landscape.

IUL is marketed heavily as a “hybrid” tool for tax-free retirement growth but is facing intense scrutiny over hidden costs and complexity.

Although IUL remains popular among high earners as a supplemental wealth vehicle, mainstream financial experts increasingly warn consumers about the gap between illustrative sales projections and real-world performance.

“The best a policy will ever look is when it’s first depicted in a sales illustration,” longtime industry veteran Dick Weber told regulators during a summer conference call.

Despite front-page controversy, IUL continues to resonate with Americans. IUL insurance sales reached a record high of $4.5 billion in new annualized premiums for the full year of 2025, and that momentum surged straight into 2026.

New annualized IUL with excess premium reached $1.1 billion in the first quarter of 2026, up 9% from the prior year, LIMRA reported. Policy count was flat year over year, and six of the top 10 IUL carriers reported double-digit growth.

IUL now represents 25% of all life insurance sold.

A pair of big issues

The key criticisms of IUL center on two areas: policy illustrations and premium financing arrangements.

On the former issue, the National Association of Insurance Commissioners has shown no inclination to reopen the life insurance illustration model regulation. The life insurance model governing illustrations dates to 1995, or just prior to Transamerica offering the first IUL product.

Over the past decade, the NAIC sought to shore up the illustration’s regulation via actuarial guidelines that can be implemented more quickly. Adopted in 2015, AG 49 established a uniform standard for index-based policy illustrations.

AG 49-A (2020) focused on curbing premium bonuses and lowering illustrated loan leverage, while AG 49-B (2023) specifically targeted volatility-controlled indexes to prevent artificial inflation of projected policy cash values.

Despite those efforts, IUL illustrations are still misleading consumers, Weber told the NAIC Life Insurance and Annuities Committee during a special conference call on the topic. A 59-year industry veteran, Weber spoke on behalf of the Life Insurance Consumer Advocacy Center in California.

“The issue is not the product,” Weber told regulators. “It’s the illustration of IUL that is creating issues for us.”

The center is seeing increased litigation involving IUL policies across the country, Weber said.

“There are quite a few cases both in California and nationwide that are involving indexed universal life, and it is on that basis that we thought it would be valuable to bring you the information that we’ve acquired,” he told the committee.

Unpredictable future returns

IUL policies typically assume a constant crediting rate over several decades, a practice that may give consumers the false impression that future returns are predictable, according to Weber.

He said policyholders often focus on projected retirement income while receiving far less information about the potential for poor performance or policy failure.

Weber said the issue is especially significant when insurance agents also serve as registered investment advisors or certified financial planners, who are subject to fiduciary obligations requiring them to act in clients’ best interests.

About 70% of IUL policies sold to high net worth consumers are marketed primarily as tax-free retirement income strategies rather than as life insurance products providing a death benefit, he said.

To illustrate the risks, Weber described a hypothetical 45-year-old client contributing $25,000 annually for 20 years. The policy illustration projected the client could withdraw nearly $89,000 a year in retirement, reflecting an internal rate of return of approximately 6.55%.

However, Weber said a stochastic analysis using 1,000 simulations based on historical market returns painted a markedly different picture. Only about 10% of the simulations produced a policy that remained in force through age 100, while roughly 905 of the 1,000 scenarios resulted in the policy lapsing before then.

“What’s important is, first, for the agent to understand, and then especially the customer to understand,” Weber said. “Not that this makes it a bad product, but that they understand what we call the good, the illustration, the bad and the ugly. Understand how it works, understand the upside and understand the downside.”

Sensitive to crediting assumptions

Weber also highlighted the sensitivity of IUL policies to changes in crediting assumptions. In one example, reducing an illustrated cap rate by a single percentage point — from 10.5% to 9.5% — caused the modeled success rate to drop to about 1%, with 989 out of 1,000 stochastic simulations resulting in the policy lapsing before the insured reached age 100.

He cited a legal case involving a registered investment advisor who recommended a premium-financed IUL strategy. The policy illustration projected decades of retirement income based on assumptions that policy crediting rates would consistently exceed borrowing costs.

Using the same stochastic modeling, however, Weber said the analysis showed a high probability that the policy would lapse before the insured’s expected life-span, potentially triggering substantial tax liabilities after years of policy loans and withdrawals.

“IUL is almost always front-loaded with expenses,” Weber said. “That’s not necessarily bad; it’s just that the illustration doesn’t express that.”

To improve consumer understanding, Weber urged regulators to consider allowing or requiring stochastic analysis as part of the illustration process so prospective buyers could evaluate a range of potential outcomes rather than relying on a single projected scenario.

He also recommended replacing traditional paper illustrations with interactive digital tools that would allow consumers to test different assumptions and see how changes in crediting rates, participation rates and policy caps affect policy performance.

Weber noted that the illustrations model not only predates IUL but also came before widespread internet access and long before tablet-based technology became commonplace.

Regulators have not responded to Weber’s presentation. While the NAIC’s Annuity Illustration Working Group is considering incremental updates to the model governing annuity illustrations, regulators have not yet undertaken a comparable effort to modernize illustration standards for IUL.

Premium financing IUL

IUL is part of another controversial practice known as premium-financed life insurance. Michael J. Rothman, chief distribution officer at Succession Capital Alliance, explained how the strategy works in a recent column for InsuranceNewsNet:

A client with a significant estate-planning need, typically a projected estate tax liability of millions of dollars, takes out a loan from a third-party lender to fund the premiums on a large IUL policy. The policy is pledged as collateral, along with other personal assets.

The client pays interest on the loan, typically out of pocket each year. The policy accumulates cash value over time, and the design assumes the cash value will eventually retire the loan principal, usually within 15 to 20 years.

“What remains is a fully funded life insurance policy that provides a tax-advantaged death benefit to address the estate tax exposure the client sought to address in the first place,” Rothman wrote. “This is not a funding strategy for the average policyholder. It is a sophisticated planning approach for clients with complex balance sheets, illiquid assets and real, quantifiable estate-planning needs.”

IUL premium financing is a viable strategy for some clients, Rothman said, but is plagued by several “misconceptions.”

“The cases driving the negative coverage are real, but they are problems of execution and disclosure, not of the strategy itself,” Rothman wrote. “There is an important distinction between the two, and it is one every advisor who works with high-net-worth clients must clearly understand.”

Nearly all the top life insurers — including Lincoln National, Pacific Life, Penn Mutual, Mass Mutual and New York Life — have been named in various IUL premium financing lawsuits.

‘Unstable financial design’

Larry Rybka is a longtime critic of IUL and responded to Rothman’s column with one of his own. CEO of the Valmark Financial Group, Rybka noted Valmark’s $70 billion in in-force life insurance.

But IUL premium financing is an “unstable financial design,” Rybka wrote, not the result of a few misconceptions and bad actors.

“My criticism is directed at a sales concept that takes an already complex, opaque and risk-sensitive product and sells it in the most aggressive, highly leveraged way possible,” he wrote.

Rybka offers several examples of how the simple math of an IUL premium-financed plan can go sideways. For example, premium finance depends on positive arbitrage, he explained. Net policy performance must exceed borrowing costs after product charges, loan costs and commissions.

“That premise is increasingly unrealistic,” Rybka wrote.

Borrowing costs often rising above 7% make it that much more difficult for an IUL premium-financed plan to win for the client, he added.

“Not every IUL product is flawed,” Rybka concluded. “Used appropriately, with full disclosure and restrained assumptions, IUL can serve a legitimate planning purpose. But premium-financed IUL is different: It layers leverage, collateral risk and optimistic assumptions onto an already complex product.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.