Planning your retirement income well can set you up for a great life after work. A good idea for a stable retirement financially is to check out different ways to generate income and also protect your finances.

An indexed universal life insurance policy (IUL) checks both boxes: it does double duty to help protect your loved ones financially while supplementing your retirement income. IULs offer flexible growth opportunities while providing protection against financial risks.

What is an IUL?

Much like universal life insurance, indexed life insurance policies are a type of permanent life insurance that offers a death benefit along with a cash value component.

Here are some other features of an IUL policy:

  • Death benefit and cash value account: Provides a payout to your beneficiaries upon your death and may accrue cash value in a separate account during the life of the policy.
  • Tied to a stock market index: Cash value grows according to a market index such as the S&P.
  • Cap on growth: The cash value account is subject to a maximum interest rate.
  • Tax-deferred growth: Money grows tax free until you withdraw the funds.
  • Flexible premiums: You can change your premium amounts or skip them as long as there are sufficient funds in the cash value to pay for the cost of insurance and administrative expenses.
  • Floor rate on how much you can lose: Carries a minimum guaranteed interest rate that's applied to the cash value to protect your money.

An IUL may be useful for various purposes, including supplemental retirement planning.

How Indexed Universal Life Insurance Supports Retirement Income Planning

How IUL builds cash value for retirement

When you purchase an IUL policy, the insurance company applies your premiums in the following two ways:

Whole life insurance cash value offers several key benefits that make it a reliable financial asset:

  1. Administrative costs: Fees that go towards managing your policy.
  2. Cash value allocation: A sum of money that applies to your cash value account.

The IUL policy is linked to a market index, like the S&P. The interest credited to the cash value account is based on the performance of the market index.

Using an IUL plan for retirement income

According to The Motley Fool, the average age of retirement is 62, up from age 59 in 2002.1 The sooner you meet your retirement income goals, the earlier you can retire.

You can access funds from your IUL cash value account to support your retirement lifestyle in two ways:

  1. Policy loan
  2. Withdrawal

Unlike IRAs and 401(k)s, you don't have to take a required minimum distribution (RMD) from your IUL at age 73.2 You have complete control over how much money you take out and when you borrow or withdraw it.

While you'll pay interest on borrowed cash value funds, the insurance company calculates your earned interest on the account's balance before the loan.3

Loans against your policy's cash value can be a tax-free source of retirement income. Be aware that each policy carries its own specifications for loans and withdrawals. It's important to review your policy's requirements and features before making a loan or withdrawal.

IUL retirement pros and cons

The following chart summarizes the pros and cons of an IUL policy.

Pros
  • ✔ High growth potential
  • ✔ Floor rate protects against losses
  • ✔ Tax-deferred growth
  • ✔ Tax-free loans
  • ✔ May have an adjustable premium, depending on the policy
  • ✔ Not counted as income for Social Security
Cons
  • X It's not as simple as a whole life policy
  • X Depending on policy and insurer, fees could be higher
  • X May have a cap on returns, depending on crediting strategy
  • X Risk of policy lapse
  • X Uncertain future performance
  • X Surrender charges for early withdrawals

Benefits of IUL in a retirement strategy

An IUL offers more than a death benefit and accessible cash. Check out these other benefits of including an IUL in your retirement income strategy:

  • Can provide tax-advantaged retirement income
  • Offers lifetime protection with built-in flexibility
  • Diversifies your income sources
  • May provide liquidity for emergencies, medical bills or major expenses

Is an IUL right for your retirement income plan?

  1. High-income earner: An individual or family that earns significantly more than the median income.
  2. Business owner: A person who accepts financial risks to operate a business.
  3. Other retirement accounts are maxed out: You are already contributing the legal allowable limits to your other retirement accounts.

IULs may be suitable for anyone who wants tax-advantaged retirement income, flexible premiums, and market-linked growth with downside protection.

IULs for retirement income: protection plus high growth

Think of IULs as extra retirement cash on top of your Social Security and other savings. IULs help your retirement savings grow and avoid losses—a big plus for your retirement plan. At Mutual of Omaha, we strive to help you meet your retirement goals so you can enjoy the lifestyle you've been dreaming about. Our financial representatives at Mutual of Omaha are eager to help you feel confident in your retirement planning.

Frequently Asked Questions

What is the minimum investment for an IUL?
The minimum investment in an IUL varies depending on the policy. You may start a policy with a small amount, such as $100 or $200. If you have the funds, you can also make a large single-payment investment and start earning interest right from the start.
Is the cash value in IUL guaranteed?
No, your policy may have a guaranteed interest rate, but your cash value may decrease because of poor index performance and the cost of administrative fees. IULs have a reputation for having high growth potential, so they're likely to grow over the long term.
Do I have to repay policy loans in retirement?
No, you have the option of repaying part of it, all of it, or just the interest. But, remember that not repaying a loan and the associated interest could decrease the amount of the death benefit.
What are the tax advantages of IULs?
IULs provide tax advantages through tax-deferred growth, tax-free withdrawals and loans, and tax-free death benefits. While your beneficiaries don't have to pay taxes on the death benefit, they may still have to pay taxes on the interest earnings and estate taxes.
Sources
  1. The Motley Fool, The Average American Retires at 62. Buying These 3 Investments Now Could Make Your Retirement Much More Comfortable, January 18, 2025 2.
  2. IRA, Retirement plan and IRA required minimum distributions FAQs, May 27, 2025 3.
  3. Kiplinger, What Is Indexed Universal Life Insurance and How Does It Work?, May 31, 2023
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