Many people first hear about Indexed Universal Life (IUL) when someone shows them an impressive-looking illustration: market-linked upside, downside “protection,” and a big projected income stream down the road.

On paper, it can look like the best of all worlds.

But buried under those glossy numbers are a lot of moving parts, non-guaranteed assumptions, and fine print most people never see, let alone fully understand.

This article will walk you through, in plain English:

• How IUL actually works
• Where the illustrated results can be misleading
• How it compares to Whole Life and Cash Flow Banking
• Smart questions to ask before you commit to any IUL policy

At Strategy West, our job isn’t to push a product. It’s to give you clear, pressure-free education so you can make informed decisions for yourself, your family, and your business.

What Is Indexed Universal Life (IUL)?

Indexed Universal Life is a type of permanent life insurance that tries to combine:

• A flexible life insurance policy
• An account whose interest is linked to a stock market index, like the S&P 500

Here’s the key idea:

• Your money is not actually invested in the stock market.
• The life insurance company credits interest to your policy based on how a chosen index performs.
• Behind the scenes, the company uses part of your premium to buy options on that index to support the crediting strategy.

On top of that, IUL policies usually offer:

• A fixed interest account
• One or more index-linked accounts (S&P 500, NASDAQ-100, Russell 2000, foreign indices, “blends,” etc.)

And one very important detail most people miss:

Dividends from the underlying index are NOT included in the IUL crediting rate.

Historically, dividends have been a meaningful part of the S&P 500’s total return—around 2% per year over the last decade—yet they’re typically excluded from IUL calculations.

Floors, Caps, and Participation Rates (Where the Trade-Off Lives)

The “sizzle” of IUL usually comes from three concepts:

1. Floor – A minimum credited rate (often 0%), so in a bad year you don’t lose value from market performance
   
2. Cap – A maximum credited rate (often 8–12%), limiting how much of a good year you can keep
   
3. Participation Rate – The percentage of the index’s gain you actually receive (e.g., 90% of a 10% index gain = 9% to you)

A simple example:

• Cap: 10%
• Floor: 0%
• Participation: 100%

If the index returns +20% → you only get +10% (the cap).
If the index returns –15% → you get 0% (the floor)… before policy charges.

And that’s crucial:
Even with a 0% floor, your account value can still go down because IUL policies deduct internal charges every month (cost of insurance, expenses, etc.).

The Historical Trade-Off

When you look back over decades of S&P 500 data with a 10% cap and 0% floor:

• There were far more years where the cap cut off your upside
• There were far fewer years where the floor “saved” you from a loss
• In one 45-year study, the cap would have limited gains in 25 years, giving up a total of more than 288% in potential return, while the floor only protected about 121% worth of losses in 10 years

In other words, you often give up more upside than you gain in downside protection.

Non-Guaranteed Policy Charges: The Quiet Performance Killer

Like other Universal Life policies, IUL contracts include:

• Cost of insurance charges
• Policy expenses

These are typically deducted from the policy every month and are not fully guaranteed. They can increase within certain limits set in the contract.

What this means in real life:

• If charges increase, more money is siphoned away from your account value
• This can cause your IUL to underperform its original illustration significantly
• In extreme cases, rising charges can force you to pay more premiums later just to keep the policy alive

So while the illustration might show a smooth, upward curve, the reality can be much bumpier, and far more sensitive to internal costs than people realize.

How Interest Rates and Volatility Can Shrink IUL Performance

IUL crediting is also sensitive to things you don’t control:

• Interest rates: The insurer’s ability to fund the option strategy used for index linking is tied to what they earn on their general account investments. Lower interest rates can put downward pressure on caps and participation rates.
• Market volatility: When markets are choppy, options become more expensive, which can also push caps and participation rates down.

So even if the index itself does well, changing caps, floors, and participation rates can quietly erode long-term performance.

AG 49 & AG 49A: Why Regulators Stepped In

IUL illustrations looked so optimistic for so long that regulators had to step in.

The National Association of Insurance Commissioners (NAIC) introduced Actuarial Guideline 49 (AG 49) in 2015, and later AG 49A (2020) to tighten the rules.

These rules:

• Limit the maximum illustrated crediting rates based on standardized historical look-backs
• Cap how much better a policy can illustrate based on special features like bonuses, multipliers, or high-cap accounts
• Restrict the illustrated spread between loan rates and credited interest on loaned values

AG 49A specifically tried to stop companies from “gaming” the illustrations with non-guaranteed enhancements that made policies look unrealistically strong on paper.

Even with these guardrails, consumer advocates still worry that IUL illustrations can feel more optimistic than reality.

IUL vs. the Market: What the Numbers Actually Show

Let’s look at a historical comparison using real return patterns, not just averages.

Using a hypothetical IUL with:

• 10% cap
• 0% floor
• 100% participation

Over the 40-year period from 1980–2019, assuming $10,000 paid in at the start of each year:

• IUL crediting pattern grew to about $1.79 million
• S&P 500 (no dividends) grew to about $3.05 million
• S&P 500 (with dividends reinvested) grew to about $6.46 million

Even more interesting:

• A simple 50/50 stock and bond index blend grew to about $3.83 million—more than double the IUL result—with less volatility than pure stocks.

The takeaway:
IUL’s downside protection comes at a significant long-term cost in total growth, especially when you factor in the missing dividends and internal policy charges.

How Whole Life and Cash Flow Banking Are Different

At Strategy West, we focus on properly designed Whole Life, often used within a Cash Flow Banking strategy. That approach is built on:

• Guaranteed premiums
• Guaranteed death benefit
• Guaranteed cash value growth
• The potential for dividends from strong mutual companies

And most importantly:

The risk stays with the insurance company. It is not shifted back to you via moving caps, participation rates, or internal cost changes.

Where IUL is built from layers of non-guaranteed elements, Whole Life’s foundation is contractual guarantees. That certainty:

• Reduces financial fear
• Supports confident decision-making
• Helps you use your money more effectively throughout your life—not just in theory at age 65

Want a Clear Comparison for Your Situation?

If you’ve already been shown an IUL illustration or you’re just curious how Cash Flow Banking with Overfunded Whole Life compares, we’re happy to walk you through it in plain language.

To find out more about how Cash Flow Banking and Whole Life insurance compare to Indexed Universal Life in your specific situation, click here to get a free 1-on-1 strategy session with our team.

No pressure. Just clarity so you can decide what truly supports your long-term certainty and legacy.