Understanding how Indexed Universal Life (IUL) works is important — but it’s not enough. You also need to know how to spot the signs of a badly designed policy.
Because even if you like the concept, a poor design can lead to:
- Higher costs
- Lower cash value
- Disappointment down the road
So let’s walk through the most common issues to watch out for when reviewing an IUL illustration or proposal.
1. No Cash Value in Year One
If your policy shows $0 in cash value during the first year, that’s a problem.
This often means:
- The death benefit is too high for the amount you’re contributing
- Or the policy wasn’t structured for cash value growth
2. Level Death Benefit
If your goal is growing cash value, your policy should usually start with the Increasing Death Benefit option.
Here’s why:
- It gives your money more room to grow
- Helps avoid early tax issues (like MEC status)
- Supports stronger long-term cash accumulation
If the Level option is selected by default, ask why — especially if you’re funding the policy aggressively.
3. No Expense Breakdown
Every IUL illustration should show a clear breakdown of internal charges.
This includes:
- Premium load (the charge taken off the top)
- Policy administration fees
- Cost of insurance (COI)
- Any rider fees
If you don’t see this section — or it’s missing details — that’s a sign the policy may not be fully transparent. Always ask to see the full expense summary.
4. Unrealistic Growth Projections
If the non-guaranteed rate on the illustration shows 7%, 8%, or higher, that might be too optimistic. Yes, IULs can grow based on market index performance — but they have caps and participation rates.
A better estimate? Use 5% to 6% to get a more realistic view of what the policy might actually deliver over time.
5. No Blended Term Insurance
Policies that are built entirely with base insurance tend to:
- Cost more in internal charges
- Build cash value more slowly
- Pay higher commissions to the agent
6. High Target Premium
The target premium is what the insurance company uses to calculate agent commissions.
Policies without blended term often have a higher target premium — meaning:
- The agent earns more
- You pay more in the early years
Ask your agent what the target premium is and whether the design can be adjusted to lower it while still meeting your goals.
Final Thoughts
You only get one chance to structure your IUL the right way from the beginning.
Many of the problems people experience with these policies come down to how they’re built, not the product itself.
So before you commit, take a step back and make sure:
- The design matches your goals
- The costs are clear
- And you understand what you’re signing up for
If you’re unsure about a policy or just want someone to double-check it, I’m happy to help you review it — no pressure, just clarity.
