When you pay an IUL premium, part of it covers the cost of insurance and policy charges, and the rest goes into your cash value. That cash value earns interest based on the performance of a chosen market index — but your money is never in the market itself.
Index crediting, caps, and floors
Each period, the insurer measures the index's change. If it's positive, your cash value is credited up to a cap; if it's negative, the 0% floor credits zero instead of a loss. Many policies also apply a participation rate that determines how much of the index gain you receive.
Accessing your cash value
As cash value accumulates, you can access it through withdrawals or policy loans. Under current tax law, properly structured policy loans are generally not treated as taxable income — which is what makes an IUL useful for tax-advantaged retirement income. Loans and withdrawals reduce the death benefit and cash value if not repaid.
Keeping the policy healthy
An IUL must be adequately funded to perform. Underfunding, maximum loans, or rising insurance costs in later years can strain a policy, so annual reviews help keep it on track.
What is the 0% floor? +
It's a contractual guarantee that your index-linked interest will never be less than zero, protecting your cash value from market losses. Policy charges still apply.
What is a cap? +
The maximum interest rate the insurer will credit in a period, even if the index rises more. Caps are set by the carrier and can change over time.
Are IUL policy loans taxable? +
Under current tax law, loans from a properly structured policy that stays in force are generally not treated as taxable income. If the policy lapses with a loan outstanding, taxes may apply. Consult a tax professional.