Indexed universal life (IUL) credits interest based on a market index, with a floor, usually 0%, so the interest credited in a bad year is never negative. In return, the upside is limited by a cap or participation rate. The floor protects credited interest, not the whole account: policy charges still come out every year.
Key takeaways
- A market loss in the years just before or after retirement can do outsized damage because withdrawals lock it in.
- IUL credits zero, not a loss, in a negative index year; gains are credited up to a cap or participation rate.
- Policy charges still apply, so cash value can go down in a zero-credit year.
- Caps and participation rates are not guaranteed and can change, within contract minimums.
Why a loss near retirement hurts more
Planners call it sequence-of-returns risk. If the market falls early in retirement while you are withdrawing money, you sell more shares to get the same income, and those shares are not there when the market recovers. The same average return can leave two retirees with very different outcomes depending on when the bad years land.
How IUL crediting works
Cash value is not invested in the market. The carrier credits interest based on how an index performs over a set period, usually one year, using three levers:
- Floor: the lowest rate that can be credited, usually 0%.
- Cap: the highest rate that can be credited for the period.
- Participation rate: the share of the index gain that counts toward the credit.
A hypothetical example, for illustration only: with a 0% floor, a 10% cap and 100% participation, an index year of minus 15% credits 0%, an index year of plus 6% credits 6%, and an index year of plus 20% credits 10%. Credited interest is locked in each period, so a later down year does not take it back.
The floor does not make IUL an investment without risk. It means a bad market year costs you growth, not credited losses.
What the floor does not protect
- Policy charges. Cost of insurance and other charges are deducted regardless of the index, so a zero-credit year can reduce cash value.
- Changing caps. Carriers can lower caps and participation rates, subject to guaranteed minimums in the contract.
- Illustrations. Projections assume a rate that may not happen. Ask to see a conservative scenario.
Where IUL fits in a retirement plan
IUL is best used as one bucket alongside retirement accounts, not instead of them. Some retirees draw from cash value in years when the market is down, which gives their investment accounts time to recover. Others use it for tax-free income to manage their tax bracket.
It works best when it is funded for years before retirement. Someone who needs the money within 10 to 15 years, or who cannot fund a policy consistently, is usually better served by other tools.
Frequently asked questions
Can my IUL lose value?
Yes. The floor applies to credited interest, not to the account. Policy charges are deducted every year, so cash value can decline in a year with little or no credited interest.
Are caps guaranteed?
No. Current caps and participation rates can change. The contract states the guaranteed minimums.
Is my money invested in the stock market?
No. The index is only used to calculate the interest credited. Your cash value is not invested in the index.
Is IUL better than an annuity for downside protection?
They solve different problems. A fixed indexed annuity is built for retirement income and has no death benefit or cost of insurance; IUL adds life insurance and tax-free access through loans.
Financial professionals: download our free one-pager, Why Clients Buy Accumulation IUL, or request an illustration. Individuals: see who buys cash value life insurance, and who it’s not for, or ask Tim a question below.
General information, not tax, legal or investment advice. Tax treatment depends on proper policy design, keeping the policy in force and current law. Policy features, riders and availability vary by carrier and state. Illustrations are not guarantees.
Reviewed by Tim Fuller on 2026-09-30
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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