Why I Don't Use Indexed Universal Life Insurance

The Letter That Changes Everything

You’ve been paying premiums for 28 years.

The policy was supposed to fund your retirement. The illustration looked beautiful back in 1996—the lines went up and to the right, the income projections were fat, and the agent told you this was the smart way to build wealth with life insurance.

Then you get a letter.

The letter says your account value has declined. It says the cost of insurance has increased. It says that if you want to keep the policy in force, you’ll need to send an additional $47,000. This year.

You’re 71 years old. You’ve paid premiums every single year. And now they want more.

This isn’t a hypothetical. This happens. There are people who sent payments on universal life policies for decades, only to receive letters informing them of huge amounts owed just to keep their policies from collapsing.

How does a “permanent” life insurance policy fall apart after 28 years of faithful premium payments?

That’s what this article is about.

Two Creatures With the Same Name

Both IUL and whole life get called “permanent insurance.” Same label. Wildly different animals.

Think of it this way: all whole life insurance is permanent insurance, but not all permanent insurance is whole life insurance. Confusing the two is like a technology writer confusing a PC with a Mac. It’s a basic, categorical error.

Whole life insurance has existed since the mid-1600s. It was the primary savings mechanism for American households before the Federal Reserve showed up in 1913.

Universal life, by contrast, crawled out of the 1980s. It was invented by E.F. Hutton—a stock brokerage firm that, in Nelson Nash’s words, “knew nothing about life insurance.”

The timing matters. Universal life was born during a period of unusually high interest rates. It looked great in the early years. The illustrations were gorgeous.

But Nash ran those illustrations himself when the product first came out. His verdict? They kept “falling apart” when the insured hit age 65 or 70. The cost of one-year term became prohibitive and “ate up the cash fund.”

Nash never sold one. And he wouldn’t buy one.

The Frankenstein Construction

Here’s the mechanical difference, and once you see it, you can’t unsee it.

A whole life policy is one integrated product. The death benefit, the cash value, the premium—they’re all calculated together using the same actuarial assumptions. You pay a level premium for your whole life. The company guarantees it will be there. At age 121, if you’re still breathing, the policy endows—the company writes you a check for the full death benefit.

That’s what “permanent” actually means. It has a finish line. It’s going to be there.

Universal life doesn’t work this way.

A universal life policy is two separate pieces stapled together: a side fund (which they call “account value”) and a one-year term insurance policy that renews every single year.

This is the part that wrecks people.

The cost of that internal term insurance isn’t fixed. It’s recalculated every year based on your attained age. And the cost curve isn’t linear. It’s exponential.

When you’re 35 or 40, the cost of insurance inside that IUL looks manageable. By 70 or 75, it’s a monster eating your account value from the inside.

Calling this product “permanent insurance”—the same label we use for whole life—is an abuse of the English language. What you actually have is annually renewing term with a side fund attached. And annually renewing term, by its nature, gets more expensive every single year until it becomes unaffordable.

The Illustration Trap

Agents who sell IUL will show you beautiful illustrations. Gorgeous. The lines go up and to the right. The income projections look fat and happy.

But here’s what those illustrations assume: that the indices will return six to eight percent annually, year over year, for the next 20 or 30 years. No down years that matter. No prolonged flat periods.

That assumption is a prayer dressed up as a spreadsheet.

The National Association of Insurance Commissioners—the industry’s own regulatory body—got so concerned about this that they imposed limits on the rates of return that could be illustrated on universal life products.

Think about that. The regulators had to step in because the illustrations were so misleading.

And what did the industry do in response? They invented “multiplying factors” and “bonus crediting strategies” and other mechanisms to juice the numbers back up. The game continues.

I’ve never seen a universal life policy perform as illustrated over the long term. Never. Not once. Could it happen? Sure. And you could also win the lottery. The question is whether you want to bet your retirement on it.

Who Holds the Risk?

Now we get to the core of it.

What is insurance? At its most basic level, insurance is paying someone else to assume a risk you don’t want to carry. You pay a premium, and in exchange, the insurer takes on liability. You’re offloading uncertainty. That’s the entire point.

With whole life, the insurance company carries the risk. They guarantee a death benefit. They guarantee cash values. They guarantee your premium will never increase. If their investments underperform, if mortality assumptions change, if interest rates collapse—that’s their problem, not yours. The guarantees are in the contract.

With universal life, the risk transfers back to you.

You, the policyholder, retain the risk that there will be a death benefit in force when you die. You carry the risk that the account value will be sufficient to cover rising mortality costs. You carry the risk that the illustrations will actually materialize.

This violates the basic principle of insurance. You’re paying premiums to assume your own risk. It’s backwards.

Think about it this way. If you buy fire insurance on your house and pay premiums for 30 years, and then your house burns down, the insurance company pays. You don’t get a letter saying, “Sorry, the account value ran dry. Good luck with the ashes.”

But that’s exactly what can happen with IUL. You pay for decades. You do everything right. And then the structure fails—not because you did anything wrong, but because the product was designed in a way that made failure possible.

The Double Whammy

Here’s something most people don’t understand about equity-indexed universal life.

When the market drops and your side fund loses value, you don’t just lose account value. You also get hit with a higher mortality expense.

Why? Because the insurance company has to cover what’s called the “Net Amount at Risk”—the gap between your account value and the face death benefit. They’re effectively carrying a one-year term policy on your life equal to that gap.

When your account value drops, that gap widens. The implicit term insurance they’re carrying gets bigger. And bigger term insurance costs more.

So in a down market, your account value shrinks and your cost of insurance expands. Double hit. Exactly when you can least afford it.

Meanwhile, with a properly-structured whole life policy from a mutual company, you’re on the other side of this trade entirely. Your cash value doesn’t drop when markets drop. Your cost of insurance doesn’t fluctuate. The guarantees hold.

And here’s the kicker: if you buy IUL from a mutual company, you’re actually feeding dividends to the whole life owners. The profits generated by universal life products flow to the participating policyholders—who own whole life. You’re making their policies better, not your own.

”But the Floor Protects Me”

The standard IUL pitch goes like this: “You get market upside without the downside. When the index goes up, you participate. When it goes down, you’re protected by the floor—usually zero percent.”

On the surface, this sounds compelling. What could be wrong with never losing money?

Here’s what’s wrong.

The floor doesn’t protect your cash value from the cost of insurance. The floor only applies to the crediting rate on your side fund. In a year where the index returns zero, your crediting rate is zero—but your cost of insurance is still deducted from your account value.

So your account value absolutely can decline. It just declines because of internal costs, not market losses. The end result is the same: less money than you started with.

The cap limits your upside more than the floor protects your downside. In any given year, you might be capped at 10% or 12% gains. But you’re not getting 12% of the S&P 500 return—you’re getting 12% of a synthetic index calculation that excludes dividends. Historically, dividends have represented about 40% of the S&P’s total return. You’re not getting them.

The participation rate can change. The insurance company can adjust caps, floors, and participation rates within the bounds of the contract. They might not do it today. They might not do it for ten years. But they can do it when conditions become unfavorable for them. You don’t have that option.

What If You’re Already in One?

If you’re reading this and you already have a universal life policy, don’t panic. Don’t run out and cancel it tomorrow.

But you need to understand what you own.

Get your annual statement. Look at the account value. Look at the surrender charge. Look at the cost of insurance line. Watch what’s happening year over year. Is the cost of insurance increasing? Is it eating into your account value faster than growth can replace it?

If you want out, there’s something called a 1035 exchange—a tax-neutral way to transfer the value from one life insurance policy to another. But you need to work with someone who understands the mechanics before you do that. There are surrender charges. There may be tax implications depending on how the policy has been structured. Don’t make a move without understanding the consequences.

The Alternative

So what do I use instead?

Dividend-paying whole life insurance from a mutual company, structured for banking.

It’s not exotic. It’s not new. It doesn’t have a cap or a floor tied to some index. It doesn’t promise you market upside. What it has is a guarantee. A contractual promise that the cash value will be there, the death benefit will be there, and the premium will never change.

The premium is level. Locked in. The same when you’re 70 as when you’re 35.

The cash value is guaranteed. It’s in the contract. Not illustrated. Guaranteed.

The death benefit is guaranteed. At age 121, if you’re still alive, the company writes you a check. That’s what permanent means.

When you buy into a mutual company, you become an owner. The profits of the company flow back to you in the form of dividends. This isn’t a side fund hoping the S&P 500 cooperates. This is participating in the oldest, most boring, most reliable financial structure in American history.

These companies have been paying dividends for over 170 years—through the Great Depression, when 38% of banks failed, and through 2008, when the FDIC fund itself went $9 billion in the hole.

The Real Question

When someone shows you an IUL illustration with numbers going up and to the right for 30 years—what exactly are they promising you?

And who carries the risk if they’re wrong?

On one side: a guarantee. A contract. A death benefit that will actually be there. Cash values that don’t depend on index performance. A premium that can never increase. Risk carried by the insurance company, where it belongs.

On the other side: an illustration. A projection. A hope that the numbers will work out. Risk transferred back to you, the policyholder. And a letter that might arrive in 28 years telling you it’s time to pay up or watch the whole thing collapse.

I know which one I’d choose. I know which one Nelson Nash chose.

The question is: which one makes sense for you?

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This article is educational only and not meant to serve as financial advice. Whether IBC or any financial product fits your situation depends on your goals, income, and overall financial picture. If you have an existing IUL policy, consult with a qualified professional before making any changes.