Indexed Universal Life (IUL) insurance is often marketed as a “best of both worlds” product—providing life insurance protection while allowing policyholders to accumulate cash value linked to market indexes. On paper, it sounds like a smart way to grow wealth safely. In reality, however, IULs are riddled with problems that make them far less attractive than financial advisors and insurance agents often claim.
Here are 10 reasons why IULs are a bad investment for most people.
1. High and Hidden Fees
IUL policies come with layers of fees—administrative costs, mortality charges, and policy expenses—that eat away at the returns. These fees are often buried in fine print and are rarely explained clearly during sales pitches. Over time, the costs compound and significantly reduce any potential growth.
For an investor seeking efficient wealth accumulation, paying excessive hidden fees is simply a poor financial move. You could achieve better growth with low-cost index funds or retirement accounts without the unnecessary drag of high charges.
2. Overly Optimistic Projections
Agents often show clients illustrations where IUL returns are pegged to a stock market index with rosy assumptions. These projections usually highlight “best-case” scenarios that are unlikely to occur consistently.
The truth is that IUL performance is capped, and real returns tend to fall far short of the glossy numbers in sales brochures. Many policyholders are shocked when their policy underperforms compared to what they were promised.
3. Caps and Participation Rates Limit Growth
Even though IULs are tied to indexes like the S&P 500, you never capture the full upside. Caps and participation rates restrict your returns, meaning you’ll only get a portion of the market’s performance.
For example, if the market grows by 12% but your cap is 9%, you lose out on the difference. That limitation makes IULs a poor choice for anyone hoping to truly benefit from long-term stock market growth.
4. Complexity and Lack of Transparency
IULs are extremely complicated products. Most buyers don’t fully understand the moving parts—credits, caps, fees, floors, and death benefit options—because the policies are designed to be confusing.
Complexity benefits the insurance companies, not the policyholder. When you don’t fully understand an investment, you risk losing money. IULs rely on this lack of transparency to make them look more appealing than they are.
5. High Risk of Policy Lapse
One of the biggest dangers of IULs is that the policy can lapse if cash value doesn’t keep up with the rising cost of insurance. This is especially common in later years when mortality charges increase.
If your policy lapses, you could lose both the insurance protection and all the money you’ve put into it. Worse, you may also face tax consequences on any gains that were inside the policy.
6. Sales Incentives Over Client Interest
IULs are notorious for being heavily pushed by agents because of the massive commissions they pay. Instead of recommending what’s truly best for a client, some agents prioritize products that give them the highest payout.
This conflict of interest means buyers often end up in IULs not because they’re the best solution, but because they’re the most profitable for the salesperson.
7. Better Alternatives Exist
For most investors, there are far better ways to grow wealth. Simple strategies like maxing out retirement accounts, investing in diversified index funds, or using Roth IRAs provide greater transparency, flexibility, and returns.
Unlike IULs, these alternatives don’t come with hidden costs, caps on growth, or the risk of losing coverage due to policy lapse.
8. False “Tax-Free Retirement” Marketing
IULs are often sold as a “tax-free retirement vehicle.” While it’s true that policy loans can be taken tax-free, this framing is misleading. Loans must be repaid, and if your policy lapses, those loans can trigger massive taxable events.
This marketing pitch plays on investors’ desire to avoid taxes but ignores the real risks that come with relying on policy loans for retirement income.
9. Poor Liquidity and Flexibility
Unlike traditional investment accounts, money inside an IUL is not easily accessible. Withdrawals and loans come with conditions, fees, and potential risks to the policy’s performance.
In contrast, retirement accounts like IRAs or 401(k)s (or even brokerage accounts) offer clearer rules and better liquidity. An IUL ties your hands financially and limits your ability to adapt to life changes.
10. Not Designed for Pure Investment
At its core, an IUL is an insurance product—not an investment vehicle. Insurance companies package and market it as both, but the investment component is secondary and comes with trade-offs that weaken its appeal.
If you need life insurance, buy term coverage. If you need investments, choose real investment vehicles. Mixing the two often results in getting a weaker version of both