The Hidden Risks of Indexed Universal Life and What Advisors Should Know

This is a summary of the full article originally published in InsuranceNewsNet by Anna Baluch, featuring insights from Michael J. Rothman.

The Rapid Rise of IUL

Indexed universal life (IUL) insurance accounts for roughly 25% of life insurance sales and continues to gain popularity. That growth gives advisors a critical responsibility: understand the product’s potential and risks before recommending it.

An InsuranceNewsNet article examines IUL’s hidden risks and offers a framework for determining whether it fits a client’s needs. Michael J. Rothman, chief distribution officer at Succession Capital Alliance, notes that IUL’s value is measured over decades, not years, and depends heavily on post-sale management.

Understanding Caps, Floors and Participation Rates

IUL policies participate in a market index, but returns are subject to caps, floors and participation rates. In return for downside protection, clients accept limited upside potential. When the market rises sharply, returns are capped. When it declines, the floor may provide a buffer but cannot prevent lost opportunity.

This tradeoff defines IUL and distinguishes it from direct equity investments. Advisors should explain it clearly and set realistic expectations.

The Illustration Problem

IUL illustrations are not guarantees. They rely on assumptions about long-term index performance, crediting strategies and policy costs that may not reflect real-world variability.

Presenting an illustration as a modeled scenario helps prevent unrealistic expectations. Advisors should explain how changing assumptions can affect policy performance.

Who is The Right Client for IUL?

IUL is not right for everyone. It may warrant consideration for clients who:

• Need death-benefit protection over the long term for estate planning, business succession or legacy transfer.
• Can support the cost of a permanent policy for many years.

The client’s goals, resources and time horizon should drive the recommendation.

Advisor Due Diligence

When considering IUL, advisors should compare performance expectations with relevant benchmarks and historical crediting results. Looking beyond the illustration can show how a product has performed across different market conditions.

Rothman also recommends open communication about questions and concerns. Clear explanations build trust and support a long-term policy relationship.

Ongoing Policy Reviews

An advisor’s responsibility continues after policy issuance. Rothman recommends annual or twice-yearly reviews to monitor performance, reinforce client confidence and identify needed adjustments.

Because IUL policies are intended for long-term ownership, consistent oversight matters. A passive approach can allow changing assumptions, costs or client circumstances to undermine results.

The Bottom Line

IUL can be valuable for the right client, but it is not a passive solution. Advisors who understand the tradeoffs, set realistic expectations, assess historical performance and review policies regularly are better positioned to deliver lasting value. The central message is simple: IUL rewards sustained advisor engagement.

To read the full article on InsuranceNewsNet, click here.