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“There is a great disturbance in the force.”
That iconic phrase feels especially fitting right now—because something big is happening in the world of life insurance, and it’s sending ripples throughout the industry. The New York State Department of Financial Services (NYDFS), a major regulatory authority, has stepped forward and made their stance unmistakably clear: they intend to crack down on insurance companies and agents who mislead consumers, especially when it comes to the sale of universal life insurance products, including Indexed Universal Life (IUL) policies.
Their concern? That these products are often wrapped in layers of complexity, with language and illustrations that obscure rather than clarify the true risks involved. Too often, policyholders are led to believe that IULs offer strong guarantees and low risk, when in fact the performance of these policies is highly dependent on fluctuating market indexes, insurer-imposed caps and participation rates, and an array of internal fees.
This move by the NYDFS signals a growing awareness that too many consumers are being lured in by promises of upside potential without being informed of the potential downsides. In other words, regulators are finally acknowledging that what looks like a solid financial strategy on the surface may, in reality, leave policyholders exposed to volatility and disappointment.
This regulatory shake-up should serve as a wake-up call—not just to the companies selling these products, but to everyday investors. Now, more than ever, it’s critical to understand what you’re really buying. Not all life insurance is created equal, and clarity, transparency, and guaranteed protection should be at the forefront of any long-term financial decision.
To understand why indexed universal life insurance is causing so many problems, you need to understand how it actually works—and why the mechanics are stacked against you from the start.
Here’s the basic setup: your premium payments go into an associated account, usually referred to as the cash account. Money inside the associated account is called cash value. The cash account is set to mirror the returns of an index –say the S&P 500. If the index goes up, your cash account is credited with gains. If it goes down, you’re protected from loss with a floor rate which guarantees a minimum return, usually about 0%.
Sounds great, right? Here’s the catch.
The insurance company limits your upside in two ways:
First, there’s the cap rate, the maximum return you can earn in any given year, regardless of how well the index performs. If the S&P 500 returns 25% in a year but your cap is set at 10%, you only get a 10% gain.
Then, there’s the participation rate, the percentage of the index’s gain that actually gets credited to your policy. If the index returns 10% and your participation rate is 80%, you only get a gain of 8% (80% of 10% = 8%).
And here’s the kicker: the insurance company can adjust both the cap rate and participation rate. What once was a 12% cap rate when you bought the policy could drop to 8% or lower a few years down the road. There’s no guarantee.
Because of the way universal life insurance policies are structured, the cost of insurance (mortality charges) increases as the policy gets older, in lieu of charging more in premiums, the insurance company automatically deducts the additional expense from the cash value.
This is why the cash value of universal policies gets depleted as the policy gets older. Once the policy runs completely out of cash value, the policy owner must shoulder the additional increasing premiums payments, to prevent the policy from lapsing.
These are just a few of the risks that the New York State Department of Financial Services (NYDFS) has highlighted, underscoring why the sale of universal life insurance products—particularly Indexed Universal Life (IUL)—can be so problematic for consumers:
Premium payments may increase over time as the policyholder ages. What might start off as an affordable monthly or annual cost can gradually become a financial burden in later years.
Premium payments are not predetermined, meaning policyholders have no set schedule or fixed amount they can rely on. This variability makes it difficult to plan ahead or manage long-term financial expectations.
Policyholders must consistently monitor their policy—reviewing updates regularly—because the coverage, costs, and projected values are flexible and can change based on a number of unpredictable factors, including interest rate assumptions, market performance, and insurer discretion.
In response to nearly 1,400 consumer complaints filed in New York alone, the Superintendent of the NYDFS issued a formal warning. He urged current and potential policyholders to educate themselves on the inner workings of these contracts. One of the major concerns is that the internal costs—like mortality charges and administrative fees—rise every year, which can make maintaining the policy unsustainable, especially for those on a fixed income.
Additionally, the Department stressed that universal life insurance products don’t offer the long-term guarantees that many consumers expect. There are no firm guarantees on the premium amounts you’ll be required to pay over time, no guarantees on how much cash value will accumulate, and no guaranteed death benefit that remains consistent throughout the life of the policy.
These warnings serve as a stark reminder that, despite their appealing illustrations and sales pitches, universal life insurance products can expose policyholders to serious financial risk—especially when compared to more stable and transparent alternatives like participating whole life insurance.
Over the last decade the sale of Indexed Universal Life has quintupled. This rise in popularity has been accompanied by growing concern among consumer advocates, financial experts, and regulatory bodies. Many argue that IUL policies are often sold through misleading tactics that gloss over the complexities and risks involved.
Birny Birnbaum, director of the nonprofit Center for Economic Justice and a former regulator, has been especially vocal about these concerns. He notes that the sale of IUL policies is driven by “false promises and deceptive marketing,” where agents emphasize hypothetical returns while downplaying or entirely omitting the risks of rising internal costs, fluctuating premiums, and the lack of long-term guarantees. In fact, Birnbaum strongly warns consumers to “stay away from them,” suggesting that the risks far outweigh the potential benefits for most policyholders.
As more stories of disappointed or financially burdened IUL owners emerge, it’s becoming clear that these policies may not be the well-rounded financial tools they’re often advertised to be—especially when compared to more transparent and reliable options like participating whole life insurance.
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Policy Checklist Make Sure You Get a Good Policy Is your policy good or bad? Use this checklist to help evaluate your existing life insurance or a new policy you are considering. |
IUL policies wouldn’t be such a problem if they weren’t sold using tactics designed to confuse and mislead consumers. Here are the red flags to watch for:
Agents may present illustrations showing your policy growing at 8%, 10%, or even 12% annually. These numbers look great on paper, but they’re just projections, not guarantees. The fine print will show much lower guaranteed values, sometimes even showing your policy lapsing entirely if current assumptions don’t hold.
Ask yourself: if the guaranteed values shows your policy running out of cash value by age 75, what is the point in even looking at the non-guaranteed values?
NOTE: Some agents do not show their clients the actual policy illustration, but create a separate illustration showing only the values the agent wishes to highlight.
Also, while it is illegal to wilfully misrepresent or present only a partial illustration, it’s something we see happening frequently.
This is a common sales pitch. You’ll be told you can take “tax-free loans” from your policy in retirement, creating an income stream that doesn’t count as taxable income.
What they don’t emphasize: those loans have to be paid back with interest, or they’ll reduce your death benefit. If you borrow too much and your cash value can’t support the policy costs, your policy will lapse, and suddenly all those “tax-free” loans become taxable income in one massive tax bomb.
Technically true, in the sense that your cash value won’t go negative when the market crashes. But you’re still at risk, rising cost of insurance, declining cash value from fees, and policy lapse if you can’t afford increasing premiums.
Figure in the cap rate and participation rate, and you’re getting a fraction of market gains while paying heavily for the privilege.
Some agents will show side-by-side comparisons making IUL look better than retirement accounts. They’ll emphasize the “tax-free” growth and distributions, downplay the fees, and use rosy projections.
What they leave out: 401(k)s and IRAs don’t have an increasing cost of insurance associated with them. The rising cost of insurance will eat the IUL policy alive in later years.
Non-guaranteed, or projected policy values don’t do much good to look at. These are non-guaranteed values, the insurance company has no obligation to meet these values. Nor is there any requirement that they should attempt to be reasonable in projecting non-guaranteed values.
You might be told that if you pay premiums for 10 years, your policy will be “self-sustaining” and you won’t have to pay anything else.
Convincing a client to purchase an IUL policy while looking only at the guarantees would be tough work indeed. We believe this is why insurance companies are so extravagant while figuring the non-guaranteed values.
Providing an agent with a non-guaranteed illustration, filled with hypothetical numbers, gives the agent a fighting chance to make the sale.
Hypothetical numbers are cheap, as the insurance company will never have to pay out on them.
If an agent can’t or won’t show you the guaranteed columns in the illustration, walk away.
If IUL policies are so problematic for consumers, why are they sold so aggressively? Follow the money.
IUL policies pay some of the highest commissions in the insurance industry. An agent who sells a IUL policy will earn much more than an agent who sells the same size whole life policy, and far more than an agent who sells a term policy. Not only does this increase their paycheck, it may help them qualify for prepaid vacations and additional perks the insurance company offers.
Why do the insurance companies pay agents more to sell IUL? Again, follow the money.
Universal policies are very profitable for life insurance companies to sell, and one of the reasons is because of the fees associated with the product. Universal insurance is known for its abundance of fees and penalties.
Here are some fees you might see on a universal policy.
-Premium expense charge (a percentage of the premium)
-Administrative expenses
-Surrender charge
-Withdrawal fees
-Rider charges
-Illustration charge
But the big reason is this: Due to the way universal life insurance is structured, most IUL policies lapse long before the insured dies, the insurance company only has to pay out a death benefit on a small fraction of universal policies.
It’s a big win for the insurance company. Not only do they get to collect premiums for many years, they get to charge fees, penalties, and to top it off, they probably won’t end up paying a dime.
IUL isn’t designed to benefit you, the policyholder. It’s designed to generate revenue for the company and commissions for the agent. The complex structure, lack of guarantees, and the ability to change the terms, all serve to protect the insurer’s interests while shifting risk onto you.
*This doesn’t mean every agent selling IUL is malicious, some agents genuinely believe they’re offering a good product.
The American Council of Life Insurers acknowledges that indexed universal life (IUL) insurance isn’t the right fit for everyone—and for good reason. Traditional whole life insurance policies, backed by the insurer’s long-term investments in stable assets like corporate bonds and government-backed mortgages, offer a more predictable and secure financial foundation. These products are built to generate reliable returns year after year, providing policyholders with peace of mind and financial stability.
By contrast, indexed universal life insurance shifts much of the financial risk onto the policyholder. While IUL products are often marketed for their potential to deliver higher returns—thanks to their tie-ins with market indexes—they lack the dependable guarantees that make whole life insurance so attractive to long-term planners.
There’s no denying that IUL policies dangle the prospect of higher earnings, but that upside comes with a catch: increased volatility and rising internal costs. As policyholders age, the cost of insurance within these policies increases—sometimes dramatically. This creates a very real risk that, over time, the policy could become unaffordable or even lapse altogether if premiums aren’t maintained at higher levels. In the worst cases, policyholders may find that what once seemed like a savvy financial strategy has eroded their cash value, left them with no coverage, and cost them far more than expected.
While the allure of market-linked growth can be tempting, it’s important to understand that with IUL, you’re also shouldering the burden of risk that traditional whole life insurance is designed to minimize.
Not all life insurance is created equal, and understanding the differences can save you from making a costly mistake.
Whole life insurance offers something IUL can’t: lifetime guarantees. Your premiums are fixed and predictable for life. Your death benefit is guaranteed. Your cash value growth is guaranteed, and you may earn a dividend(not guaranteed, but many mutual companies have paid them consistently for many years, some companies have paid a dividend for over 100yrs consecutively).
With IUL, there is very little that is guaranteed. Your premiums can increase. And both your cash value and your death benefit can decrease and disappear entirely.
Term life insurance is straightforward: you pay premiums, and if you die during the term, your beneficiaries get the death benefit. No cash value, no complexity, no hidden fees eating away at your money.
If you just need temporary coverage for a specific period, like until your kids are grown or your mortgage is paid off, term insurance does the job well.
Term insurance makes sense when you need affordable coverage for a specific timeframe and don’t want any cash value.
Whole life insurance makes sense when you want permanent coverage with guaranteed cash value growth, predictable premiums, and a death benefit. It’s also the best type of insurance to use for those practicing infinite banking.
IUL? The only time IUL makes sense is when you fully understand and accept that you’re taking on all the risk while the insurance company limits your upside and increases your costs every year. For most people, that’s not a trade worth making.
If you already own an IUL policy and you’re realizing it might not be the right fit, you’re not stuck. Here are your options:
This is the simplest option: you cancel the policy, take whatever cash value has accumulated (minus surrender charges), and walk away.
Before surrendering, calculate the total amount you’ve paid in premiums versus what you’re getting back. It’s often a sobering comparison.
A 1035 exchange allows you to transfer the cash value from your IUL policy into a different life insurance policy (or annuity) without triggering immediate taxes.
If you still need permanent life insurance coverage, exchanging your IUL for a properly structured whole life policy from a mutual insurance company can give you the guarantees and stability your IUL lacks. You’ll have fixed premiums, guaranteed cash value growth, and predictable costs.
Not all companies will accept 1035 exchanges from IUL policies, and not all policies will have enough cash value to make the exchange worthwhile.
If you’re considering an IUL policy, or reviewing one you already own, these questions will help you cut through the sales pitch and get to the truth.
When an agent gets defensive, vague, or tries to brush off these questions, that’s your signal to walk away. A good agent will welcome these questions and answer them thoroughly because they want you to make an informed decision.
If an agent says “don’t worry about the guaranteed column” run. A good agent should be focused on the guaranteed side of the contract.
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Another factor with indexed universal life is the fees associated with premiums paid. According to Steven Roth, president of Wealth Management International (an insurance analyst and litigation consultant) these fees can be upwards of 8% on premiums and cash values of the policy. When market conditions are less than desirable these fees can drain your policy dry of cash values and even cause it to lapse if you can’t fork over more money in premiums to keep the policy afloat. This occurred with many index universal policy owners during the COVID-19 downturn. Even though the investment loss was zero, the fees caused losses of several percentage points in the accumulated cash value of many policyholders.
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When considering an indexed universal life (IUL) insurance policy, it’s crucial to make your decision based solely on the guaranteed elements—the minimum cash values and the guaranteed death benefit. Anything beyond that is speculative at best and dangerous at worst. Relying on projections, illustrated returns, or assumed market performance introduces a level of risk that many policyholders are neither prepared for nor fully understand. The truth is that many IUL buyers find themselves blindsided years down the line, watching their policy costs soar while their projected gains never materialize. This can result in the loss of their investment and their insurance coverage.
These contracts are often 50 to 70 pages long, filled with dense legal jargon crafted by insurance company attorneys. This complex language isn’t there to protect you—the buyer. It’s designed to protect the insurer. It’s no surprise, then, that insurance regulators across multiple states are sounding the alarm. They’re beginning to understand just how complicated and opaque these policies can be, and they’re urging consumers to exercise extreme caution, encouraging a more informed approach before signing on the dotted line.
From my perspective, the average person doesn’t need universal life insurance. Trying to merge investment vehicles with insurance coverage is like mixing oil and water—they’re incompatible. This is the flaw of universal life insurance policies. They attempt to do too much and often end up doing neither well. Most people would be better off keeping their insurance and investment strategies separate—using participating whole life insurance for long-term guarantees and security, and exploring other investment options for growth. When you try to get everything from one product, you often end up with a watered-down version of both.
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