Life Insurance

Indexed Universal Life (IUL)

Indexed universal life insurance credits interest based on the performance of a market index such as the S&P 500, subject to a cap and a floor—typically 0%—so cash value cannot lose value due to index declines.

Last reviewed: May 2026 · Editorial methodology

Definition

Indexed universal life (IUL) insurance is a form of permanent coverage that tracks an external index—most commonly the S&P 500—to determine the interest credited to the policy's cash value each segment period, usually one year. A participation rate (e.g., 100%) determines what share of index gains are credited, while a cap rate (often 8–12%) limits the maximum credit, and a floor (typically 0%) ensures the policy never credits negative interest even when the index falls. For example, if the S&P 500 gains 18% in a segment but the cap is 10%, the policy credits 10%; if the index falls 20%, the policy credits 0%. A 45-year-old purchasing a $750,000 IUL might pay $800 per month for 15 years, building cash value intended to supplement retirement income tax-free through policy loans. Insurers can change caps and participation rates after issue—subject to contractual minimums—which can significantly alter long-term performance versus illustration projections. IUL policies have attracted regulatory scrutiny for overly optimistic illustrations; buyers should stress-test projections at 4–5% credited rates before purchasing.

Where this term matters

Life Insurance →Insurance Companies →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

Universal Life InsuranceUniversal life insurance is a type of permanent coverage that lets policyholders adjust their premium payments and death benefit amounts within certain limits, with a cash value component that earns interest.Variable Universal Life (VUL)Variable universal life insurance combines the premium flexibility of universal life with investment sub-accounts similar to mutual funds, allowing cash value to grow—or shrink—based on market performance.Cash ValueThe savings component inside permanent life insurance policies that can be borrowed against or withdrawn.Participating PolicyA participating policy entitles the policyholder to share in the insurer's divisible surplus through annual dividend payments, a feature most commonly associated with whole life policies issued by mutual insurance companies.1035 ExchangeA 1035 exchange, named after IRC Section 1035, allows the tax-deferred rollover of cash value from an existing life insurance policy to a new life insurance policy or annuity—or from an annuity to another annuity—without triggering a taxable event on the transferred gain.

Related guides

Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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