‘Recession-Proof’ Insurance Is Trending. Safety Net or Scam?

The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.Imagine an all-in-one financial product that lets you save for retirement tax-free while protecting your loved ones. It's pitched as life insurance you can use while you're still alive, and even better, you can earn stock market-like returns without any of the losses.This is how indexed universal life insurance (IUL) is often promoted on social media. Influencers promise a "recession-proof retirement," a message that resonates given that nearly two-thirds of Americans (62%) believe the U.S. economy will enter a recession in the next 12 months, according to a June NerdWallet survey conducted online by The Harris Poll.Americans are buying in. New IUL policies brought in a record $4.5 billion in premiums in 2025, according to LIMRA, an insurance and financial services trade group. But behind the social chatter is a wave of consumer confusion. A gap in marketing regulations makes IULs susceptible to misleading sales pitches, and some consumers are paying the price with their retirement savings.Here's what you need to know before you buy.The social media glossOnline videos tout IULs as completely safe, tax-free retirement funds that can outperform a 401(k) or IRA. "Zero is your hero" is a common catchphrase, referring to the fact that IULs come with a floor that's typically set to 0%. Even if the market crashes, the interest rate credited to your IUL will never dip below 0%.But these sales pitches rely on incomplete sound bites, says Dick Weber, co-founder of the Life Insurance Consumer Advocacy Center, a nonprofit consumer advocacy group. While IULs are legitimate permanent life insurance products that build cash value, the viral clips only tell half the story.When you buy a traditional investment like a mutual fund, the person selling it has to hold federal securities licenses and clearly disclose risks. But with IULs, your money never enters the stock market. Insurers keep your cash in a general account and use market indexes, like the S&P 500, as a benchmark to calculate your interest. So legally, an IUL is an insurance product, not a security — and the various costs associated with holding life insurance coverage can affect your policy's performance.Because IULs toe the line between insurance and investment without crossing it, the people who sell them don't have to follow the same federal regulations that stockbrokers and investment advisors do. They don't need securities licenses, and they often don't carry the fiduciary duty to act in your best interest. Without these regulations, agents can get away with quoting low premiums while burying the true costs of an IUL policy."What those promoters are claiming would be illegal and sanctionable by anybody in any other segment of the financial service business," says Barry Flagg, a certified financial planner and founder of life insurance analytics firm Veralytic."The people who are saying IUL is better than a 401(k), they better be disclosing the costs, just like you have to in a 401(k)," he says. "And more often than not, the promoters that I've seen on LinkedIn and on YouTube never talk about costs."What the sales pitches don't tell youIf you flip past the first few pages of an IUL policy illustration — the document showing how your policy should perform over time — you'll eventually get to three levers that reveal how a "risk-free" policy can still lose money.1. Front-loaded feesAn IUL contains a layer-cake of internal expenses, including administration and asset management fees, and the cost of insurance needed to cover your death benefit — or the payout your family receives when you die.Weber warns these expenses are heavily front-loaded in the first 10 to 15 years of the policy. If the market is down, the insurer still withdraws these fees every month, quietly draining your principal. And it can take 20 or more years to build up enough cash value to total the premiums you've paid into the policy.2. Inaccurate earnings illustrationsSales pitches can also misrepresent how much you'll earn with an IUL.In recent years, regulators capped the maximum crediting rate a policy illustration could project. But the fix created a new issue. If a policy illustration is forced to use a flat 5.5% cap, the insurer's software prints out a timeline assuming the policy will credit exactly 5.5% every single year for up to a century.This smooth line completely erases the ups and downs of the market. In the real world, a string of 0% years early on, combined with high fees, can permanently starve the account before interest ever compounds.3. Earnings caps and shifting participation ratesIf you're wondering how an insurer can afford to promise a 0% floor, it's by installing a ceiling as well. Even if the market booms, your wins are limited by an earnings cap (usually 8% to 12%) and a participation rate (the percentage of that cap you're actually credited).For example, if the market surges 20%, but your policy has a 10% cap and an 80% participation rate, you walk away with an 8% return. And what many consumers don't realize is their insurer can change these rates at any time.Flagg learned this firsthand when he bought an indexed product for his children's future college fund."I put the money into an indexed annuity with a 70% participation rate, and I figured ... that's perfect for my kids' college education," Flagg says. "The very next year, they changed the participation rate from 70% to 30%. And there was a surrender charge, so I couldn't get out."How to read past the sales pitchJust because there are a few bad actors doesn't mean all IULs are a scam. When designed correctly, IULs can be a good option for moderate-risk individuals who want permanent life insurance and can keep up with high premiums during down markets. Just make sure you max out your 401(k) and other traditional tax-advantaged accounts first.If you're considering an IUL, protect yourself from misleading pitches by following these steps.1. Vet the agent. While standard insurance agents aren't legally bound to act in the client's best interest, many do so on principle. Weber recommends interviewing a few agents to see if they focus on your needs and risk profile over a quick commission. To verify their record, run a search on their state's Department of Insurance website, which tracks disciplinary actions and consumer complaints.2. Demand the numbers. Don't trust the glossy growth projections on the first page of a policy illustration. Ask for two pieces of information:Year-by-year cost disclosures. This details the internal policy fees, showing how much of your premium goes toward wealth building versus company expenses.Year-by-year performance requirements. This tells you the minimum return a policy must maintain each year to hit the growth targets you've been shown. If a policy requires an uninterrupted market return of 8% for 40 years to stay afloat, skip it.It's not uncommon for agents to omit this information from their sales pitches. And without it, Flagg says, you're essentially taking your money to Vegas. "The house always wins. And if you don't know the odds, if you don't know your costs … you are going to lose."Most consumers don't need to step into the insurance casino at all. Term life insurance is usually sufficient. It's straightforward, transparent and cheap.Unless you have specific needs an IUL can fill, the smartest financial play is a simple one: Keep your investing and your insurance separate.

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Elizabeth Aldrich writes for NerdWallet. Email: [email protected].

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