Indexed Universal Life (IUL) Policies

Limits and charges built into the policy decide how much of the index’s growth you receive, and the charges still come out when the index does poorly. Policies are often sold with illustrations showing steady growth, but the numbers in an illustration are estimates, not promises, and a loan taken against the policy can drain its cash value until the coverage ends. Losing money in an IUL policy is not, by itself, a claim. The key questions are whether the policy fit the investor and whether the professional who sold it fulfilled their duties.

This May Not Be Your Fault

If your policy has not performed the way the sales presentation suggested, you are far from alone. These policies are hard to follow, and the numbers in an illustration are hard to read correctly.

That is why whoever sold you the policy had a duty to explain it accurately, including which numbers were estimates and not promised. Insurance sales follow state insurance rules, and the National Association of Insurance Commissioners (NAIC), made up of state insurance regulators, sets standards for how illustrations of indexed policies may show index credits and policy loans. If the seller was also registered with the Financial Industry Regulatory Authority (FINRA) and recommended the policy as part of an investment strategy, FINRA’s rules may come into play. That depends on the product and how it was sold.

How Indexed Universal Life Policies Work

As FINRA explains, an IUL policy follows a set stock index rather than letting you pick investments. The insurer credits your cash value using a formula, and limits in that formula decide how much of the index’s gain reaches you:

• A cap — a ceiling on the credit. A New York insurance regulator’s policy outline describes the credit as the lesser of the index’s change and the cap, and not less than zero.
• A participation rate — the share of the index’s gain that is credited. FINRA describes it this way for indexed annuities, and indexed policies use similar tools.
• A spread — a set percentage subtracted from the index gain, used in some contracts instead of or alongside a participation rate.
• Charges — the cost of insurance and other fees come out of the cash value. Wisconsin’s insurance regulator notes that the cost of insurance rises as you age and that extra premiums may be needed later to keep a policy in force.

A policy may be built so the credit cannot fall below zero, but the charges still come out. Loans add strain. Texas regulators explain that an unpaid loan lowers the death benefit, and that if the cash value reaches zero, the policy could lapse, which means the coverage ends.

Illustrations need care. California’s Department of Insurance says an illustration shows results if the items that can change stay at their present level, and that actual results may be better or worse. The NAIC’s guidance for indexed policies limits the index credit rate and policy-loan leverage an illustration may show. FINRA says IUL is generally not considered a security.

Example: an illustration shows steady growth for decades, but the credit is capped, some years credit nothing, the cost of insurance climbs with age, and a loan taken for retirement income keeps growing, until too little cash value is left to keep the policy in force.

Common Examples of Indexed Universal Life Claims

• An illustration that assumed index credits the policy was never promised to deliver, presented as likely or typical — see Misrepresentation and Omission
• A policy described as having “market upside” and no downside, without explaining caps, charges, and the risk of lapse
• Policy loans recommended for retirement income without explaining that unpaid loans and interest can drain the cash value
• An IUL recommended to a retiree or someone on limited income who could not keep paying for it — see Unsuitable Recommendations
• Existing investments or retirement savings sold or moved to pay for a policy, with no side-by-side comparison — see Regulation Best Interest
• Borrowed money used to buy or fund the policy, without a clear explanation of the risk

How Can You Protect Yourself From Indexed Universal Life Losses?

An IUL can fit some plans, but it takes more questions than most products. A few steps that help:

• Ask which numbers are not promised. NAIC and state guides tell consumers to ask what part of a policy’s value or premium is not fixed, including what the illustration assumes about index credits and charges.
• Get the cap, participation rate, any spread, and charges in writing. Ask how each one could change. A New York regulator expects a policy to state that the interest credited and the charges can change.
• Ask for the worst case. The NAIC’s buyer’s guide suggests asking what the highest premium might be to keep coverage in force. Request an updated illustration each year.
• Ask before you borrow. Find out what a loan does to the death benefit and cash value, and talk to a tax professional first.
• Think twice before replacing a policy you already own. Compare the two in detail, and do not cancel your current policy until the new one is in place.

Signs Your Indexed Universal Life Policy May Have Been Unsuitable

• The illustration showed steady growth year after year, and your policy has not matched it
• You were told you could have “market upside” with no risk of loss
• Your premiums or charges rose, or you were asked to pay more to keep the policy in force
• Your cash value is far lower than expected or has stopped growing
• You were told to borrow from the policy for income, and the loan balance has grown
• You were encouraged to sell investments or move retirement savings to pay for it
• No one gave you the actual cap, participation rate, and charges in writing