The Hard Truth about IULs with Living Benefits

Let's face it – when it comes to life insurance, especially complex products like Indexed Universal Life (IUL) policies with living benefits, there's a lot of information (and misinformation) floating around. As someone who works with these products daily, I've heard everything from "it's the perfect solution for everyone" to "it's too complicated and expensive."

The truth, as usual, lies somewhere in the middle. Today, I'm pulling back the curtain on IULs with living benefits – giving you the straight facts about what works, what doesn't, and answering the questions I hear most often. This is a starting point to begin the conversation.

What Exactly Are We Talking About?

Before diving into pros and cons, let's quickly recap what makes an IUL with living benefits unique:

• Indexed Universal Life (IUL): A permanent life insurance policy with a cash value component that grows based on the performance of a market index (like the S&P 500).

• Living Benefits: Features that allow you to access your death benefit while you're still alive if you experience qualifying health events.

• Dual Purpose: Provides both death benefit protection and potential for tax-advantaged cash accumulation.

Now let's get into what's good, what's challenging, and what people really want to know.

The Pros: What Makes IULs with Living Benefits Attractive

Protection Beyond Death Benefits

The most significant advantage of these policies is right in the name – living benefits. Unlike traditional life insurance that only pays out when you die, these policies can provide financial support during three major health crises:

• Chronic Illness: If you can't perform at least two activities of daily living (like bathing or dressing) or suffer severe cognitive impairment, you can access a portion of your death benefit.

• Critical Illness: Heart attacks, strokes, cancer, and other major diagnoses could trigger a lump-sum payment.

• Terminal Illness: If diagnosed with less than 12-24 months to live (depending on the policy), you can access a large portion of your death benefit.

These benefits essentially provide a self-contained safety net for health emergencies without purchasing separate long-term care insurance.

Tax Advantages That Are Hard to Beat

IULs offer a triple tax advantage that few other financial vehicles can match:

• Tax-deferred growth of your cash value

• Tax-free access to your money through policy loans and withdrawals (when structured properly)

• Tax-free death benefit to your beneficiaries

For high-income earners facing limited contribution options with traditional retirement accounts, this creates a powerful alternative for tax-efficient wealth accumulation.

Market-Linked Growth with Downside Protection

Your cash value grows based on the performance of a market index, but with two key protective features:

• Floor protection: You won't lose money in market downturns (typically 0% floor)

• Participation caps: While your upside may be limited (often 9-13% caps), you're protected when markets crash

This "have your cake and eat it too" approach allows for growth potential without the anxiety of watching your retirement savings plummet during market corrections.

Flexibility That Evolves With Your Life

IULs offer flexibility that traditional whole life policies often don't:

• Adjustable premiums (within limits)

• Adjustable death benefits

• Multiple indexing strategies to choose from

• Access to your money when you need it through loans and withdrawals

The Cons: Important Considerations Before Buying

Complexity That Can Be Overwhelming

IULs are among the most complex insurance products available. Understanding how the indexing strategies work, how costs affect performance, and how to optimize the policy requires education and attention:

• Multiple moving parts (insurance costs, indexing methods, caps, participation rates)

• Policies that look similar can perform very differently

• Requires active management and periodic review

Higher Costs Than Term Insurance

IULs come with several expenses that can impact performance:

• Cost of insurance charges: Increase as you age

• Administrative fees: For policy maintenance

• Premium loads: Taken from each premium payment

• Index option costs: Charges for the indexing strategies

These costs mean that early cash value growth is often slow, making these policies more suitable for long-term planning (10+ years) than short-term goals.

Potential for Policy Lapse If Not Properly Managed

One of the biggest risks with IULs is policy lapse due to:

• Insufficient premium payments

• Excessive loans against the policy

• Poor market performance combined with high insurance costs

If a policy lapses with outstanding loans, you could face a significant tax bill on phantom income. This risk increases as you get older and insurance costs rise.

Illustrations vs. Reality

The projections shown when you're considering purchasing an IUL (called illustrations) are based on hypothetical returns and current costs, both of which can change:

• Market returns may not match the illustrated rates

• Insurance costs can increase (though there are contractual maximums)

• Policy changes or loans can dramatically alter performance

Common Questions About IULs with Living Benefits

"How do living benefits actually work? Is it automatic?"

Living benefits aren't automatic – you must file a claim and qualify under the policy terms. Each company has slightly different qualification criteria and payout structures:

• Some provide monthly payments

• Others offer lump sums

• Most have maximum benefit amounts that may be less than your full death benefit

It's crucial to understand that using your living benefits reduces your death benefit, since you're essentially accessing that money early.

"Is an IUL a good retirement savings vehicle?"

It depends on your situation:

• Potentially yes if: You're maxing out traditional retirement accounts, need additional tax-advantaged growth, want downside protection, and have a long time horizon (15+ years).

• Probably not if: You haven't funded your 401(k) or IRA, need short-term liquidity, or can't commit to long-term premium payments.

IULs work best as part of a diversified retirement strategy, not as your only retirement vehicle.

"What happens if the market crashes? Will I lose my cash value?"

No – and this is one of the key selling points. Your principal is protected against market downturns by the policy's floor (typically 0%). You won't earn interest during negative market years, but you won't lose value either (except for the ongoing policy charges).

"How much do I need to put into an IUL for it to work effectively?"

Most financial professionals recommend:

• Funding at or near the maximum non-MEC limit (to maximize tax benefits)

• Committing to at least 10-15 years of premium payments

• Having sufficient disposable income that you won't need to surrender the policy early

The actual dollar amount varies widely based on your age, health, and policy design.

"What's the difference between an IUL and a whole life policy?"

Both provide permanent life insurance with cash value, but they grow and operate differently:

• Whole Life: Guaranteed growth, fixed premiums, dividends possible (but not guaranteed)

• IUL: Index-linked growth (non-guaranteed), flexible premiums, potentially higher upside

Whole life offers more certainty; IULs offer more growth potential and flexibility.

Is an IUL with Living Benefits Right for You?

An IUL with living benefits could be right for you if:

• You want permanent life insurance protection

• You're concerned about chronic, critical, or terminal illness risks

• You've maxed out traditional retirement contributions

• You want tax-advantaged growth with downside protection

• You can commit to funding the policy for 10+ years

It's probably not right for you if:

• You need life insurance for only a specific period

• You're looking for the lowest-cost life insurance

• You need guaranteed returns

• You haven't established an emergency fund or funded other retirement accounts

The Bottom Line

IULs with living benefits aren’t magic bullets or shady schemes—they’re sophisticated financial tools that can serve the right person well, but they’re not for everyone. The most important thing is to fully understand what you’re getting, how it fits your needs, and how it might help shape your financial future.

These policies can offer valuable protection and growth, but they do require some commitment and ongoing attention. If you’re thinking about an IUL with living benefits, make sure you work with someone who values transparency and will walk you through the pros, cons, and all your options.

Want to see where you stand on your financial journey? Take our quick financial life assessment— "Let's Begin with Financial Fundamentals" - it’ll give you insights into your strengths, opportunities, and what steps to consider next. Start your financial check-in now and move one step closer to your goals.

IUL with Living Benefits Series - Article 4 of 5 - Author: John Ortiz