Is Indexed Universal Life (IUL) a Bad Investment? 7 Common Criticisms, Tested on One Real Policy

Search for whether indexed universal life (IUL) insurance is a bad investment and you will find lists of reasons. The same ones come up again and again: the fees are high, a cap holds back the growth, the cost of insurance rises with age, the growth is not guaranteed, and the policy can lapse [1] [2].

Each of those criticisms is a claim about numbers, so we checked each one against the numbers of one real illustration: a 30-year-old man who does not smoke, with a $500,000 level death benefit and about $101,000 of premiums paid over the first 4 years, then nothing. Most of the testing is in our other articles, and each section below links to the article with the detail. Our article on whether IUL is a good investment tests the selling points carriers publish in the same way.

Sources. [1] The Motley Fool, "Indexed Universal Life (IUL) Insurance: What It Is and Whether It's for You", by Dana George, updated February 21, 2023: lists insurance costs that rise after age 50, fees that reduce any gains, and a policy that lapses when its cash value runs out. [2] MoneyGeek, "What Is Universal Life Insurance? (2026 Guide)", by Mark Fitzpatrick, updated September 14, 2026: lists a cap on an IUL's gains, growth that is not guaranteed, insurance costs that rise with age, and a lapse when a policy is underfunded.

The 7 criticisms at a glance

On this policy, 4 of the 7 criticisms held up, and 3 held up only in part:

Are IUL fees too high?

Partly. On the real illustration we analyzed, the fees came to about $36,000 over the first 40 years, and about $20,000 of that came in the first 10 years; after that, the yearly fees were a fraction of a percent of the cash value. IULCheck.com breaks down every fee on your own illustration, year by year.

The first 10 years are expensive because a premium charge comes off every premium, paid in the first 4 years, and a charge on the amount of coverage runs for the first 10. Measured against what the policy credits, the fees come to about 4% of the interest credited over 40 years.

That sounds small, but fees compound: every dollar charged in an early year is a dollar that never earns interest afterward. If the same premiums had grown at the illustrated 6.59% a year with no charges at all, the account at year 40 would be almost 30% larger.

Held to age 100, the fees come to about $129,000, most of it after age 70, as the cost of insurance rises with age. The cost of insurance pays for the death benefit, which an index fund does not provide.

These figures are for a policy funded heavily in its first 4 years. A policy funded closer to the minimum carries the same kinds of charges on a much smaller account, so the same fees take a much larger share of it. How much an IUL costs breaks the fees down year by year.

Does a cap hold back an IUL's growth?

Yes. A cap keeps every rise above it from reaching your account, and the other crediting terms work in a similar way: a spread takes the first few points of each rise, and a participation rate below 100% passes on only part of it. On the policy we analyzed, the account with a spread instead of a cap earned more over real S&P 500 history. IULCheck.com tests each account in your own illustration against the same history.

The capped account credits the index's rise up to 10.5% in a year. The uncapped account has no cap but subtracts a 5.5% spread from each year's rise. Both credit nothing in a year the index falls. Credited from the S&P 500's actual price change in each year from 1996 to 2025, the capped account earned about 5.7% a year and the uncapped account about 7.6%.

The difference was not limited to those 30 years. Over every 30-year stretch of S&P 500 history from 1946–1975 to 1996–2025, 51 in all, the capped account earned between 4.7% and 5.9% a year and the uncapped account between 5.6% and 8.6%, and the uncapped account was ahead in every stretch. Neither account counts the index's dividends, because the crediting follows the index's price only. What an IUL would have earned over the last 30 years shows why the spread kept more of the strong years, and our guide to understanding IUL explains how caps, spreads and participation rates work.

Is the rate on an IUL illustration higher than what you actually earn?

Partly. The 6.59% printed on the illustration we analyzed is not what the policy earns: after the charges, the illustration's own figures grow about 5.9% a year over 40 years. But against real S&P 500 history, the illustration's projection was neither consistently too high nor too low; it depended on which account you chose. IULCheck.com measures what your own illustration actually earns, and how its accounts would have done on real history.

The printed rate is the interest credited before the charges come out. Your actual growth rate, the IRR, depends on how long you hold the policy: on this illustration it is about 3.5% a year after 10 years, about 5.9% after 40 years, and about 6.2% held to age 100. It never reaches the printed 6.59%.

Real history gave mixed results. At year 30, the illustration's own figures grow about 5.6% a year. Over the 51 30-year stretches of S&P 500 history, the capped account earned between 4.7% and 5.9% a year, on both sides of that 5.6%, and the uncapped account earned between 5.6% and 8.6%, at or above it. IUL illustrated rate vs. IRR shows how to work out the IRR of your own illustration in a spreadsheet.

Can you get your money out of an IUL in the early years?

Not all of your money, for the first 5 years of the policy we analyzed, and potentially longer if the market is bad. Surrendering in year 1 would return about 59% of the premium paid that year, and the surrender value does not pass the total premiums paid until year 6, even at the illustrated rate. IULCheck.com reads the surrender values on your own illustration.

The illustration prints two values each year: the cash value, and the surrender value, which is what you would receive if you ended the policy. The difference is the surrender charge. On this policy, the surrender charge stays the same for the first 3 years, then falls every year until it reaches zero in year 11.

These surrender values assume the illustrated 6.59% rate every year, which is not guaranteed. In a bad market the policy credits less, and the surrender value can take longer to pass the premiums paid.

Ending the policy is not the only way to reach the money. Our article on how to access cash value in an IUL compares surrendering with taking a policy loan.

Can an IUL lapse?

Yes, but on the policy we analyzed, a crash did not cause a lapse; a long flat market did. In the two flattest of the 24 markets we tested, the policy ran out of money by itself, at 89 on one and at 92 on the other, with nothing borrowed at all. IULCheck.com runs your own policy through the same markets, flat ones included.

Through every crash we tested, the floor credited nothing instead of a loss, and the recovery years that followed refilled the account. In the flattest markets, the credits stayed near zero while the charges kept coming out.

Outside the flattest markets, the policy held up well. In 7 of the 9 kinds of market we tested, it could lend 95% of its cash value, the most it allows, and still remain in force to age 100. How much you can borrow from an IUL has the full results.

This policy was funded heavily and early, which works in its favor. A policy funded closer to the minimum has less cash value to absorb the charges, and our guide to understanding IUL explains how paying too little can lapse a policy.

Can the carrier change the cap and the spread?

Yes, within limits the contract sets. On the policy we analyzed, the contract lets the carrier lower the cap from 10.5% to as little as 4%, and raise the spread from 5.5% to as much as 20%. IULCheck.com reads the guaranteed limits from your own illustration.

The illustration holds today's cap and spread for every year it projects, and so does every test in this article. A carrier that moved either one toward its limit would credit less in every year after the change.

Would you do better investing the money yourself?

On the policy we analyzed, yes, by nearly 2 to 1 over 50 years. The same premiums in an S&P 500 index fund, sold and taxed at 23.8% after the S&P 500's actual years from 1976 to 2025, came to about $9.3 million, against about $5.0 million from the largest tax-free loan the policy could make. IULCheck.com makes the same comparison for your own policy, at your own tax rates.

That is an after-tax growth rate of about 9.7% a year for the fund, against about 8.3% for the policy. Our article comparing this IUL with an S&P 500 index fund sets out how we compared them and what we assumed.

The result did not depend on the order of those 50 years. Reversed and shuffled into random orders, the same years still gave the fund 1.8 to 2.0 times as much as the policy at year 50. The order did matter in between: in 3 of the 5 orders, a downturn put the policy ahead for a while: for 1 year in the reversed order, 2 years in the 2nd shuffled order and 24 years in the 1st. Our article on sequence-of-returns risk shows when.

Adding life insurance to the fund's side did not change the answer. With a 30-year term policy bought beside the fund, the term policy and the fund would have paid a beneficiary more than the IUL in 65 of 70 years, and the fund had more cash to use at most ages. The IUL had more cash from age 49 to 61 and again from 83 to 87. Our article on buying term and investing the rest vs. an IUL has both comparisons.

What does an IUL do better than investing?

3 things held up in our tests: the floor credited nothing instead of a loss in every crash we ran, the policy's loans were tax-free and large enough to borrow the most it allows in most markets, and the death benefit lasts for life, as a set amount for as long as the policy stays in force. Our article on whether IUL is a good investment tests each selling point carriers publish, and IULCheck.com checks each selling point on your own illustration.

So, is IUL a bad investment?

As an investment alone, the policy we analyzed did worse than investing the same money in an S&P 500 index fund in nearly every test we ran. As life insurance with a floor and tax-free loans, it did what it promises. IULCheck.com applies the same tests to your own illustration.

Of the 7 criticisms, 4 held up on this policy: a cap holds back the growth, the money is locked up in the early years, the carrier can change the terms, and investing the money yourself came out ahead. The other 3 held up only in part: the fees were heavy only in the first 10 years, the printed rate is higher than what the policy earns but real history landed on both sides of the illustration's projection, and the policy lapsed only in a long flat market, not in a crash.

These findings are for one policy: a 30-year-old man who does not smoke, a policy funded heavily in its first 4 years, a state with no income tax, and the uncapped account. An older buyer, a policy funded closer to the minimum, or a capped account would likely do worse on several of these tests, and someone who needs lifetime coverage is paying for something the fund does not provide.