Why IUL Is A Bad Investment? 10 Reasons To Find The Answer!
Normal people who aren’t educated about finance, especially IUL, are trapped in the smart pitches that are positioned as benefit-driven for you. Yet, the actual perks of IUL (Indexed Universal Life) insurance aren’t transparently explained to prospects like you. So, it’s super helpful for you if you take out your time from a busy schedule and research on your own rather than relying on the so-called financial advisor.
If you’re reading this article before getting pitched for investing in IUL and wondering why people have blog posts, YouTube videos with the titles of “Why IUL is a Bad Investment?” you’re on the right track. Tax-free retirement income, investment growth in one product, get stock market returns without any risks of losing your investment, the rich are using this strategy, and Be Your Own Bank, these are the common “USPs” explained by the agents to invest in IUL. You must have heard that a half-truth is considered a white lie. This is exactly what’s happening here.
In this guide, you’ll learn about why IUL is a bad investment, or whether is IUL a good investment at all. In either case, you’ll find your answer to “Is IUL worth it?”. So, let’s dive in.
What Is An IUL Investment & How Does It Work?
If you want to understand the ins and outs of IUL and whether it’s a good investment or not for you, you’ll have to know the basics pretty well to make a decision. Indexed Universal Life (IUL) Insurance is a type of lifetime insurance in which you have to pay premiums each month. One part of that premium is saved as your life insurance and the other one goes to the cash value account each month which is kinda considered like the stock market but mainly tied to the S&P 500 Index.
Now, you must be thinking it’s a perfect go-to, win-win deal for you, but there’s something more to the deal. And those points are often not communicated by the agents (coz obviously they don’t wanna miss out on making a crazy-ass bonus by getting you signed up).
Don’t worry, we’ll cover those hidden strings that are attached to the IUL bank account in detail, so you can know why IUL is a bad investment, or if not, then how you can make it work to your benefit. For now, we’re gonna tell you the top, solid 10 reasons why IUL is a bad investment for you. Definitely, if anything will impact you negatively, then it will impact your loved ones and your family.
10 Reasons Why IUL Is A Bad Investment: A Must-Read If You’re Considering IUL
You must have heard that everything in this world has its pros and cons. Having an IUL account is considered a good investment by a group of investors, while a bad one for others. Since we’re looking at the 10 reasons why IUL is a bad investment for your investment portfolio, we’ll stick to that. Shall we?
1. Hidden Costs
IUL marketers convince the professionals and pre-retirees by expanding their pitch on presenting the IUL account as if there wouldn’t be any taxes on their investment (the premium they have to pay each month). There are different costs of opening and pursuing an IUL account, such as Cost of Insurance (COI), monthly admin fees, and surrender fees, just to name a few.
The reason why we’re calling it “hidden costs” is that these costs or fees (whatever you wanna call it), these agents never tell you about the percentage it would churn off of your savings in your account.
2. Low Return Potential Due to Cap Rates
Cap rates refer to the maximum limit your investing account has, which means if the S&P 500 makes a 15% jump and you have a cap rate of 8%, you wouldn’t get the 15% profit but the 8%. That’s where the real challenge begins. Because you’re investing in it as if you’re doing in stocks, yet the profit you would receive will be limited.
Now, if you think of yourself as a long-term player in this game, it’s a big loss for you from a financial perspective. Think about if you’re missing out on 7% in a year, how much growth would you miss out on in 5 years? That’s where it becomes alarming.
3. Complex and Hard to Understand
If you’re thinking of investing in IUL, you must understand the jargon (and tons of it) that is used in day-to-day activities. And it becomes even harder for those who aren’t directly linked to the finance or investment niche, which, we’re assuming, you are, that’s why you’re reading this article. Misunderstanding or confusion between these terms directly impacts your ability to understand and get benefits from this investment.
Jargon is not the only aspect that complicates it. The rules are constantly shifting as the insurance companies might change the cap rates tomorrow, so you never know what’s coming your way.
4. Risk of Policy Lapse
The investment gains from a universal life policy can get out of hand if your cash flow isn’t maintained. For example, as you get older, your ability to make money will be affected if you’ve been trading your time in return for money all your life. Unfortunately, it’s highly likely to collapse the policy as your cash value wouldn’t keep up with the cost of insurance. Plus, on top of that, in case of a low-return year, the policy will become fragile for you because whatever return you have received is already capped, so the room for growth has become super limited for you.
So, you need to take everything into account before proceeding with the investment, or the better way would be to consult someone who has already done it and ask for their genuine opinion.
5. Tax Pitfalls (MEC Trap)
If you’re a youngster who’s thinking of investing in an IUL bank account just because it gives you a low-risk investment and lifetime insurance, then you need to think again. Because once you have stepped into it without proper research, you would probably fall prey to the unexpected penalties and loan traps, which are quite complicated to figure out. Especially if you’re under 59 1⁄2, the MECs with a 10% IRS penalty. Basically, MEC is a Modified Endowment Contract, which means if you try to overfund the policy beyond IRS limits, it will turn into MEC, and you’ll lose the tax-free loan benefit of IUL. Due to this, most people think why IUL is a bad investment.
6. Misleading Sales Tactics by Agents
It varies from agent to agent, but overall the scenario is pretty much the same with every one of them. Actually, even if they target the right audience, which is wealthy people who have got bucks to invest in such policies, it might be beneficial for them in one way or another. But middle-class professionals who are already struggling in their financial life, when they’re pitched with such optimistic projections on the return rate per year without discussing the cap rate, additional fees, loan interest, steep internal costs, and surrender charges, etc.
Sometimes, it even becomes the worst investment decision one can make in their lifetime. So, be active and aware if you’re getting pitched to invest in IUL. It’s about the policy, but your understanding of how it works and your current financial situation.
7. Poor Liquidity in Early Years
This is one of the major reasons why IUL is a bad investment. In the first 5-10 years, when you’re expecting to grow your cash value by paying premiums each month, you don’t realize that a big chunk of your premium will go into covering high fees and insurance charges. You don’t even have the option to take out your savings without any negative impact on your life insurance. You should be aware of the fact that if you try to take out your savings, or even a loan, and you don’t do it correctly, it’ll trigger the system that makes you pay heavy taxes on every withdrawal and loan (forever).
8. Indexing Isn’t True Market Growth
Apart from the insurance perk, when you look at the investing side of IUL, considering it the same as investing in the stock market is a red flag. Because when you’re investing in the stock market, you’re making every single decision by yourself. For example, how much to invest, when to sell the stock, when to claim the profit, etc. IUL is a completely different story.
Everything is controlled by the insurance company, such as the cap rate, formulas, participation rates, etc, which doesn’t give you enough control over the results. Moreover, you don’t even get stock dividends which make a large portion of investment returns over the span of a few years.
9. Loan Washout Risk
Another reason why IUL is a bad investment is when you are being pitched, you’re told that you can take out a loan from your IUL account, and you wouldn’t have to pay any taxes. Technically, they’re telling the right information, but there’s a catch: you have to pay interest on your loan. And suppose if you urgently need a big loan, bigger than your cash value in the account, the policy will collapse, drowning you in heavy interest and taxes on your loan. Now, does it sound like what the agent told you? Nope. Because the agents are not being transparent with potential consumers, they end up calling it “IUL scams” when they don’t understand what’s happening.
10. Better Alternatives Exist
In 2025, there’s an alternative to every product and service, which gives several options to consumers. IUL is a great product, yet there are some downsides as we discussed above, so there are a few “better alternatives” we’d suggest if you are booking to invest + get life insurance.
The Bottom Line: Why IUL Is A Bad Investment?
Indexed Universal Life is a great investing tool for those who already have a chunk of wealth, but if you’re currently hustling financially, you should think again if you’re considering investing in IUL. The 10 reasons why IUL is a bad investment are clearly stated above, which makes it pretty easy for you to see the hidden problems with indexed universal life insurance.
We’ll end this article on a note that you should take every possible risk into account and calculate your ability to handle that risk financially before you buy the IUL. Best of luck with making the right decision for yourself.