How to tell if your IUL is designed correctly
There is a simple test for whether an IUL has been designed appropriately. Take the death benefit on the policy, and pull a quote for whole life insurance with the same death benefit at the same underwriting class. Compare the premiums.
If the whole life premium is in the same general range as what is being put into the IUL, the IUL is probably designed correctly. If the whole life premium is two, three, or four times higher than what is being paid into the IUL, that is a warning sign — it suggests the IUL is being treated as a discounted alternative to whole life, which is the structural error that caused the failures in the 1980s.
The reason this test works is that there is no magic in universal life insurance that makes the underlying mortality cost cheaper. The same mortality tables apply to whole life, term, and universal life. The probability of dying at a given age does not change based on the kind of policy held. What differs is how the premiums interact with the policy’s expenses and crediting structure. If the premium is too low for the death benefit being supported, the policy will eventually have a problem regardless of which chassis it sits on.
This is also why we treat the question as one of design rather than product. The same IUL contract can be set up to function as a stable, long-running asset or to slowly self-destruct, depending entirely on how the death benefit and premium are calibrated to each other. Our long-run analysis comparing IUL to whole life assumes both contracts are set up correctly — the comparison only makes sense once the design question is settled.
The real source of IUL problems is execution
There are people walking around today with poorly designed indexed universal life insurance policies. There will continue to be. The lawsuits and the news stories about underperforming IULs are real, and they happen because the people designing these policies sometimes do not understand the mechanics, or because the policy was structured to chase a specific death benefit number rather than serve the policyholder’s actual goal. The litigation pattern we’ve tracked across six years of IUL cases is consistent on this point: it is almost always a design problem dressed up as a product problem.
But these are execution failures, not product failures. The policy didn’t betray the owner. The policy was set up incorrectly from the start. A six-times-too-large death benefit funded with one-sixth of the necessary premium is not a flaw in indexed universal life insurance. It is a flaw in the design.
When indexed universal life insurance is designed appropriately — with the death benefit calibrated to the premium, with cash value accumulation as the goal, with the expense structure understood and accepted — it does what it is supposed to do. The fees do not eat the policy. The cash value compounds. The death benefit grows. And in some cases, by the time the policyholder reaches their 90s, the policy is holding ten or fifteen times its original death benefit in cash value.
That is what a working IUL looks like. The horror stories are about something else entirely.
Closing the loop on your own policy
If you own an indexed universal life insurance policy and you are not sure whether it has been designed correctly, the answer is not to panic, and it is not to assume the worst. It is to actually look at the structure. Pull the illustration. Look at the death benefit relative to the premium. Compare the premium to what the same death benefit would cost in whole life insurance. Look at the projected fees as a percentage of cash value over time.
If the policy is structured correctly, you should be able to see it in the numbers. If something is off, the numbers will show that too.
Want a real read on your own IUL?
If you own an indexed universal life policy and aren’t sure whether it’s designed to last, we’ll look at your illustration with you. No sales pitch, no obligation — just an honest read of the math. Most calls take about 30 minutes.
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Common questions about IUL fees and policy failure
Do IUL fees really go up over time?
The cost-of-insurance charge inside an IUL is age-graded, so the per-thousand cost of mortality does rise as you age. But that is only one part of the expense load. In a properly designed cash-accumulation IUL, the cash value grows much faster than the cost of insurance rises, so fees as a percentage of cash value drop sharply after the early years and stay low for the rest of the policy’s life. The headline number that matters is fees as a share of cash value — not the raw COI.
At what point will an IUL policy actually lapse?
An IUL lapses when cash value plus crediting can no longer cover ongoing expenses. In our stress test, that required designing the policy with six times the appropriate death benefit and funding it with about one-sixth of the appropriate premium. Even then, the policy stayed in force into the policyholder’s early 90s. A lapse before that point almost always means the policy was set up with the wrong relationship between premium and death benefit from day one.
What does “minimum non-MEC death benefit” mean and why does it matter?
It is the smallest death benefit a carrier can issue for a given premium without the policy becoming a Modified Endowment Contract under IRC §7702A. The minimum non-MEC design maximizes cash value because more of every premium goes into accumulation rather than supporting unnecessary death benefit. It is the structural foundation for a cash-accumulation IUL that doesn’t fail.
How can I tell if my IUL is designed correctly?
Run the whole life comparison test. Pull a whole life quote at the same death benefit and same underwriting class. If the whole life premium is in the same neighborhood as what you’re paying into the IUL, the IUL is probably calibrated correctly. If the whole life premium is two, three, or four times higher, the IUL is being asked to do something it can’t sustain — and the design needs attention.
What if I need more death benefit than the minimum non-MEC design provides?
Layer term insurance on top of the IUL. Use the IUL to do what it does well — accumulate cash value efficiently — and use a 20- or 30-year term policy to cover the additional death benefit need. By the time the term ends, the IUL’s increasing death benefit and growing cash value have usually caught up to or exceeded the original total. Inflating the IUL itself to absorb the death benefit need is what breaks the policy.
What is the cost of insurance (COI) charge in an IUL?
The COI is the monthly mortality charge the carrier deducts from cash value to cover the “net amount at risk” — the difference between the death benefit and the cash value. As cash value grows toward the death benefit, the net amount at risk shrinks, which reduces the dollar size of the COI even as the per-thousand rate rises with age. In a well-funded design this dynamic is the reason fees as a share of cash value compress so sharply over time.
Are there guaranteed credits inside an IUL that offset fees?
Many current-generation accumulation IULs include a contractually guaranteed bonus — sometimes called a policy value enhancement or persistency bonus — layered on top of the index credit. In the policy used in this analysis, that guaranteed credit is 0.25% in years 1–15 and 0.50% beginning in year 16. On its own, that 0.25% roughly matches the policy’s 0.20–0.25% lifetime average expense load through the first 15 years, and the 0.50% credit from year 16 onward exceeds it. Critics rarely account for either.
Is it true that IULs are “ticking time bombs”?
It is true of some IUL policies. It is true of any cash value life insurance policy where the premium has been calibrated too low for the death benefit being supported — which is the same problem that gave universal life a bad reputation in the 1990s and 2000s. It is not true of indexed universal life as a product. A correctly designed accumulation IUL can absorb dramatic departures from optimal funding without failing, as the stress test in this post shows. The problem is the design, not the chassis.