Indexed Universal Life Insurance (IUL) is a type of permanent life insurance policy that combines the death benefit protection of traditional life insurance with a cash value component. The unique aspect of an IUL policy is how the cash value is credited with interest, which is tied to the performance of a stock market index, such as the S&P 500.

Like other universal life insurance policies, IUL allows flexibility in premium payments. Policyholders can adjust the amount and frequency of payments.  As with any life insurance, it provides a death benefit to the beneficiaries upon the death of the insured. This benefit is generally tax-free.

Part of the premium payments goes towards building a cash value, which grows over time. The growth is linked to a stock market index but does not directly invest in the stock market. The interest credited to the cash value is based on the performance of a chosen index. Most IUL policies have a guaranteed minimum interest rate (floor), which means the cash value won’t decrease if the index performs poorly.

Since the returns are linked to a stock market index, there is potential for higher returns compared to traditional whole life insurance policies. Notably, the cash value in an IUL policy grows tax deferred. This means you don’t pay taxes on the interest gains as they accrue. As an added benefit, policyholders can take loans or make withdrawals from the cash value, which can be used for any purpose.