Indexed Universal Life Insurance

IUL policies credit interest based on the performance of a market index (like the S&P 500) subject to a cap and floor. If the index returns 15% and your cap is 10%, you're credited 10%. If the index drops 20%, the floor (typically 0%) protects you from losses. You don't directly invest in the market.

The cap is the maximum interest rate you can earn in a given period. The participation rate is the percentage of index gains credited to your policy. With a 12% cap and 100% participation, 15% index gains credit you 12%. With a 50% participation rate, 10% gains credit you 5%.

You cannot lose existing cash value to market downturns due to the floor (typically 0%). However, policy costs and fees are deducted from your cash value. If the policy is underfunded or market performance is poor for extended periods, fees could deplete cash value over time.

IUL can be an excellent retirement supplement because cash value growth is tax-deferred, and you can access it through tax-free loans. Unlike 401(k)s and IRAs, there are no contribution limits or required minimum distributions. However, IUL works best as part of a diversified retirement strategy.