Criticisms of Indexed Universal Life

Updated March 2026 · by John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

19 years designing client policies: 14 on my own family, from 3 true mutual companies

The criticisms of Indexed Universal Life (IUL) are mostly inherited — and the honest ones deserve a straight answer. Universal Life earned real scorn in the 1980s when double-digit crediting rates were illustrated as if they’d last forever, and IUL rides on the same chassis, so it gets lumped in. Two criticisms survive scrutiny: nothing obligates a carrier to raise your caps, and the cost per unit of insurance rises every year. Both have mechanics behind them — and counterweights — that neither the promoters nor the critics will walk you through. That’s what this page is for.

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Almost everything you’ll read on this topic comes from one of two corners: promoters who can’t acknowledge a real downside without threatening the sale, and critics who’ve never run the numbers on a properly designed contract. I’ve spent 19 years designing these policies, and I’ll concede the industry’s worst chapter freely — because the only way to judge IUL honestly is to understand exactly what went wrong the first time, and what’s structurally different now.

The Biggest Egg on the Face of Universal Life

Universal Life was invented in the early 1980s, when interest rates were spiking and people wanted a product that handed them nearly pure participation in those rates. They abandoned other insurance products to get it, and UL was all the rage.

Then the industry made the mistake it still makes: treating an illustration as if it were fact — as if the projection is the thing you’re buying. Those illustrations took the double-digit crediting rate of the moment and ran it forward, year after year, as though it would simply keep happening.

It didn’t. Rates spiraled downward for the next thirty-plus years. The last data point in the rate history I walk through in the video is May 25th, 2018, and by that point rates had started ticking back up — though several challenges were keeping them from skyrocketing the way they had before.

In a low-rate environment, with the 10-year treasury in the two and a half to three percent range, the fixed account inside an IUL policy still works the way the fixed rate in those old Universal Life policies worked — and a fixed rate was all those older policies had, since they carried no index crediting at all. Fixed rates inside an IUL commonly run 3% to 4%, sometimes a little lower or a little higher depending on the product and the carrier.

What went wrong back then is that rates like those were being illustrated as double-digit returns, and consumers didn’t get the return they were expecting.

I don’t know why more of them never followed up with the carrier, or why their agent never checked back in. Because something has to give. If the illustration showed one level of performance and the policy is delivering less, the only way to get the result you were shown is to put in more premium.

Needless to say, people didn’t do that. They waited years — often until the policy was about to lapse — and by then there was no runway left to make it right. A lot of those policies blew up.

Now play the tape forward instead. If you buy an indexed universal life policy in a low-rate environment — the lowest rates have been since any Universal Life product existed — then whether rates meander up from there or spike dramatically, shouldn’t the returns you actually experience come in better than the illustration you were shown?

Think about it critically and that’s the photo negative of the debacle that followed Universal Life’s launch in the early 80s. And I know what some of you are thinking: “Wait. I’m not getting a fixed interest rate on my policy. I’m participating in the index.”

Caps Are Really a Function of the Fixed Interest Rate

A cap is really a function of the fixed interest rate available inside the policy — which is why caps have moved with interest rates for as long as IUL has existed. To see why, start with the choice you actually have: you don’t have to participate in the index at all. With a fixed rate of 3% to 4% sitting there, you get to decide every single year how much of your cash takes that steady rate and how much you push into the index to earn 0% to 12%, or 0% to 13%, or 0% to 11% — whatever the cap on your policy happens to be.

All of those numbers used to be higher. When indexed universal life was first being sold, a cap of 14% wasn’t unusual. I’ve seen 15%, and some of the earliest policies had caps in the high teens. So if caps were higher back when interest rates were higher, shouldn’t caps climb again when rates do?

There are other factors involved, but the honest answer is that they probably should. Here’s the mechanic: whatever interest the carrier would have credited you for staying out of the index, they keep instead and spend in the options market buying S&P options. The more interest they would have paid you, the more options they can buy, and the higher the cap they can offer. Your carrier is effectively running the index hedge on your behalf, with the floor written into your contract. That’s how it should work in theory.

In a low-rate environment, with the caps that come along with it, we were seeing average crediting rates in the neighborhood of 6% to 7%. As rates rise from a level like that, there’s a good chance the average crediting rate illustrated on an IUL policy rises with them.

Does it have to? Absolutely not — which walks us straight into another of the major criticisms of indexed universal life, the guarantees. Nothing obligates an insurance company to raise your cap.

There is a counterweight, though. Your cash value will be accumulating enough inside the policy that you can surrender it or 1035 exchange it into something better — exactly what people did when UL was born and they walked away from older policies to get in. So carriers are incentivized to stay somewhat competitive with the other product offerings out there. There’s a good chance you’ll find that as interest rates go up, IUL carriers raise their caps in tandem, because they have a bigger options budget to play with.

The Rising Cost Structure Inside a Policy

The other major criticism of indexed universal life — of any Universal Life — is that the underlying cost structure inside the policy goes up each and every year.

Back in the 1980s that was a double whammy. Rates were trending down, so policies weren’t delivering the performance owners were used to. Meanwhile the cost of the net amount of risk — the death benefit over and above the cash value — kept climbing, with no performance underneath it to absorb the increase. That combination is what created the great debacle in our industry.

There were safeguards available inside those policies, and there are safeguards inside indexed universal life. They just never got touted as loudly as they should have been.

Start with what that rising cost actually is: a cost per unit of death benefit, not a charge against the whole death benefit. Your death benefit is a fixed number. Your cash value is climbing underneath it by whatever degree it climbs. What you get charged for is the gap between the two — the net amount of risk, meaning the death benefit over and above your cash value that the carrier would actually have to pay out.

So even though the underlying cost of insurance for your age keeps rising inside the policy, you’re buying fewer and fewer units of that death benefit as your cash value converges on it.

And since most people buy indexed universal life for the cash rather than the permanent death benefit, you have two ways to control those costs. Get decent performance, or manually ratchet the death benefit down — so long as doing so doesn’t violate the MEC limits at any point during the life of the policy.

Any time after year 7 you can run the calculation and see how far you’re able to reduce the death benefit, so that you’re paying for fewer and fewer units of net amount at risk.

And if you’re paying for very little net amount at risk, keeping the death benefit alive mainly for the tax sanctuary it creates, then does it really matter what the cost per unit of that insurance runs? It pales next to the interest you’d be earning and the compounding you’d be getting on the cash value inside the policy.

Responsibility and Thinking Critically

The moral of the story is two-fold: responsibility, and thinking critically.

On responsibility — I happen to know agents who bought Universal Life in that era. Their policies performed much worse than illustrated, and their policies are doing just fine. Their cash is growing nicely, because they either chose to fund the policy heavier and put more premium in early to support the death benefit, or they manually reduced the death benefit so the rising costs never cannibalized and eclipsed their cash value.

If you’re going to look at an indexed universal life policy, work with an agent who is going to help you service it — or who has a team that will.

And if that agent leaves the business, or the two of you have a falling out, remember that it’s ultimately your product and your responsibility. You can call the carrier, request a new servicing agent, or deal with the carrier directly to run the projections, see whether you’re on track, and make the necessary adjustments to your own policy.

The second half is thinking critically. Universal Life’s early history was bad — I’ll admit that freely. But don’t stop at the hype. If a product bought into the teeth of falling rates turned out badly, ask the obvious follow-up question: what should happen to the same product bought when rates have far more room to rise than to fall?

Notice that neither side of this debate will hand you that question. A promoter won’t raise the 1980s at all, and a critic won’t follow the logic past them. The debacle was never really about the product — it was about illustrations treated as fact and policies nobody serviced. Both of those are things you can control, and neither one is a reason to leave the mechanics unexamined.

Click here to schedule a call with us to take a deeper dive into Indexed Universal Life — a generic article can list IUL’s criticisms all day, but it can’t stress-test your illustration against them.

John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

Founder of BankingTruths.com · 19-year practitioner · 14 family banking policies across 3 companies · independent broker

BankingTruths.com is John “Hutch” Hutchinson’s independent education and brokerage platform, not a captive agency tied to one carrier. Educational only. Indexed Universal Life policies involve fees, caps, participation rates, spreads, policy charges, and loan risk. Index credits are not guaranteed. Policy loans and withdrawals may reduce cash value and death benefit, may cause the policy to lapse, and may create taxable income if not managed properly. This analysis represents the author’s professional opinion based on 19 years of experience and should not be considered tailored financial advice for your personal situation. Consult your tax, legal, and financial professionals before implementing any strategy.