Posted on December 5th, 2025.

Planning for retirement is about more than saving enough money. It is also about how efficiently you can use those dollars when you stop working, especially after taxes. That is what draws many people to indexed universal life insurance, or IUL, as part of a broader retirement plan.

Instead of relying only on traditional accounts that may create taxable income later, some households look for options that can provide flexibility and potential tax advantages. IUL policies sit in that space, combining permanent life insurance with a cash value that can grow over time. Used well, they can become another tool for shaping retirement income.

They are not magic, and they are not right for everyone. IUL policies are long-term contracts with costs, moving parts, and rules you must understand. When you do, they can help you protect your family, build tax-deferred value, and potentially access that value in a tax-efficient way during retirement.

Understanding Indexed Universal Life Insurance

Indexed universal life insurance is a type of permanent life insurance. It offers a death benefit that can protect your family, along with a cash value account that can grow while the policy is in force. Part of every premium you pay goes to the cost of insurance and policy fees, and the rest goes into the cash value. Over time, that cash value can become a meaningful financial resource.

The unique feature of an IUL is how the cash value earns interest. Instead of a fixed rate, the crediting rate is tied to the performance of a market index, such as the S&P 500. Your money is not directly invested in the index. Instead, the insurer uses a formula, usually with a cap and a floor, to determine how much interest is credited. This structure lets you benefit from some of the market’s upside while limiting downside risk.

Most IULs have a zero percent floor, which means your cash value will not lose value due to a negative index return, although policy charges still apply. At the same time, caps and participation rates limit how much of a strong market you actually receive. That balance is what makes an IUL appealing to people who want conservative growth rather than full market exposure. It is important to understand the specific cap, floor, and fee structure in your contract.

The tax treatment is another key part of the appeal. Cash value in an IUL grows tax deferred. You are not paying income tax on gains each year while the money stays inside the policy. If you later access the cash value through properly structured withdrawals up to your basis and policy loans, you can often do so without creating taxable income. This is why some people view IULs as a potential source of tax-advantaged retirement income.

However, tax benefits depend heavily on how the policy is designed and managed. Overfunding a policy or making large changes can cause it to become a modified endowment contract, or MEC, which changes the tax rules on distributions. Allowing a heavily loaned policy to lapse can also create a tax bill. That is why careful planning and ongoing review are fundamental.

Compared with traditional retirement accounts, IULs do not have IRS contribution limits or required minimum distributions. On the other hand, they include insurance costs and are not primarily investment products. For many people, an IUL, if appropriate, works best as a complement to, not a replacement for, tools like 401(k)s, IRAs, and pensions.

Leveraging IUL Policy Loans for Income

One of the most discussed features of indexed universal life insurance is the ability to access cash value through policy loans. In retirement, those loans can be used to create a stream of income that is generally not treated as taxable, as long as the policy stays in force and is not an MEC. This is a major reason IULs are often included in tax-free or tax-advantaged retirement conversations.

To understand how this works in practice, it helps to look at the basic mechanics that support the strategy. The sequence is usually: fund the policy, allow cash value to grow over time, then carefully draw on that value through loans in retirement. Each step needs to be planned and monitored so the policy remains healthy and the tax benefits are preserved.

• Initial Setup and Cash Accumulation: Early on, part of your premiums goes toward building cash value inside the policy. That cash value earns interest based on index performance, subject to caps, floors, and fees. The goal is to fund the policy enough, especially in the early years, so that it can support both long-term insurance costs and future withdrawals or loans.
• Access via Policy Loans: When cash value has grown, you can borrow against it. These policy loans are generally not taxable because they are treated as loans, not income. As long as the policy stays in force, you can use this feature for periodic or one-time amounts to supplement other retirement income sources.
• Flexible Repayment and Interest Strategy: Policy loans usually do not require fixed repayment schedules like a bank loan. Interest still accrues, and unpaid loan balances reduce your death benefit and available cash value. You can choose to repay some or all of the loan over time or allow the balance to remain, as long as the policy can support it.
• Protections and Safety Nets Within the Policy: Even while you are taking loans, the remaining cash value can continue to earn index-linked interest. Floors help protect against poor market years, though charges and loan interest still apply. This structure offers more stability than simply withdrawing from a volatile investment account, but it must be managed carefully.

Compared to traditional retirement accounts, which usually generate taxable income when you withdraw, IUL loans can provide more control over your tax picture. This can be especially valuable for people in higher tax brackets or in states with significant income taxes. The trade-off is that mismanaging loans, underfunding the policy, or ignoring rising costs can lead to a lapse and potential tax consequences.

Because of these risks, policy loans should not be an automatic choice. They work best when the policy is intentionally designed for future income, monitored regularly, and adjusted as your needs, health, and market conditions change. Used thoughtfully, they can be a flexible tool in a broader retirement income plan.

IUL Strategies for Tax-Free Retirement

Getting real value from an IUL starts with clear goals. Some people focus on maximizing the death benefit for family protection, while others prioritize cash value growth for future income. You can design the policy to lean more toward one or balance both. That includes decisions about face amount, riders, and how aggressively you plan to fund the policy.

Premium flexibility is a major feature of IUL strategies. You can often pay more in strong income years to build cash value faster, then reduce payments if your budget tightens, subject to policy minimums. Front-loading funding within your comfort level can help create a stronger base for later policy loans. At the same time, underfunding over long periods can weaken the policy and limit its usefulness in retirement.

Allocation choices are another key factor. Most IULs offer different index options and sometimes a fixed interest account. Matching your allocations to your risk tolerance, time horizon, and goals helps balance growth potential and stability. Some policyholders keep a portion in the fixed account for predictability, while using index options for conservative upside potential.

Coordinating an IUL with other retirement tools can make your overall plan more resilient. For example, someone might rely on taxable accounts and traditional IRAs early in retirement, then use IUL loans in years when higher taxable income would push them into a higher bracket. Used this way, an IUL can act as a “tax bracket management” tool, smoothing out income over time.

Ongoing monitoring is key. Insurance costs increase as you age, and market conditions change. Periodic reviews can help you adjust premiums, allocations, and planned loan amounts so the policy remains on track. This is also the time to check for potential MEC issues, confirm that the policy is projected to stay in force, and make course corrections if needed.

It is important to remember that “tax-free retirement” with an IUL is not automatic or guaranteed. Outcomes depend on how the policy is designed, how it performs, how loans are used, and how long the policy stays in force. For many people, an IUL is one part of a diversified, tax-aware retirement strategy, not the entire foundation.

Related: IUL vs. Whole Life: Which is the Best Permanent Insurance?

Planning Your Next Step with David Harris Insurance Agency

Indexed universal life insurance can be a powerful planning tool when it is built and managed with care. It offers permanent protection, potential cash value growth, and ways to access that value in a tax-efficient manner. It also comes with costs, rules, and risks that deserve honest attention before you commit.

At David Harris Insurance Agency, we help you look at IUL policies in the context of your whole financial picture. That includes discussing your goals, other retirement accounts, risk tolerance, and family needs, then explaining how an IUL might fit alongside those pieces or when a different solution might make more sense.

If you would like to explore whether an IUL strategy is right for you, contact us now. Get a quote for your IUL policy! 

Reach out to us at (952) 444-9590 or [email protected] for more details.