IULs for Retirement? Why I Don’t Recommend Them to My Clients
Indexed Universal Life (IUL) insurance is being overhyped on social media as a retirement solution, but the data tells a different story. According to HonestMath.com, IULs are overly complex, often underperform compared to Roth IRAs, and come with hidden fees, risks of policy lapse, and unpredictable returns.
As a Financial Advisor, I’m seeing a troubling trend on TikTok and Instagram where insurance agents, posing as “financial experts” but not licensed as financial advisors, are aggressively promoting Indexed Universal Life (IUL) insurance policies as the ultimate retirement solution. A recent report from HonestMath.com caught my eye, and it confirmed my concerns: IULs aren’t the golden ticket these influencers claim. I’m all about keeping things clear for my clients, so let’s break down the pitfalls with my favorite format: bullet points.
- Way Too Complicated: IULs promise growth by linking returns to a market index, but the HonestMath.com report reveals they’re a maze of factors: market performance, policy loan interest rates (4% to 6%), cap rates (8% to 12%), and insurance fees. It’s a headache! Clients can’t easily access the cash value, and early surrender means penalties. I always tell my clients: why overcomplicate things when a Roth IRA is so much simpler?
- They Often Underperform: The report’s Monte Carlo simulation compared a leveraged IUL to a Roth IRA, modeling U.S. large-cap equities (using the S&P 500 as the benchmark, based on historical data from Robert Shiller, 1963-2022) and U.S. corporate bonds. The results are stark: at a 10% cap rate and 5% loan interest rate, the IUL underperformed the Roth IRA 95% of the time. Even in the best case (8% cap, 4% loan rate), it lagged 90% of the time. The “Distribution of Economics” graph showed the Roth IRA often outperformed by $979,000 or more. I can’t in good conscience recommend something that fails so frequently for my clients’ retirement.
- Risks and Hidden Costs: IULs carry big risks: policy lapse can devastate finances and trigger tax penalties. There’s also counterparty risk (what if the insurer falters?) and regulatory risks. Add in the fees and insurance costs that erode returns, and it’s a tough sell. The HonestMath.com analogy hits the nail on the head: using an IUL for retirement is like hammering with a wrench. I’d rather my clients use a hammer, like an IRA or 401(k), built for the job.
- A Smarter Alternative: Mega Backdoor Roth: For clients looking to maximize tax-free growth, I recommend the Mega Backdoor Roth strategy. It lets you contribute up to $69,000 in 2025 to a 401(k) with after-tax dollars, then convert to a Roth IRA. But here’s the catch: your 401(k) plan has to allow after-tax contributions (beyond the usual pre-tax limit) and let you move that money to a Roth IRA while still working. Not all plans do, so I help clients check with their employer’s HR or plan provider to confirm.
IULs might sound promising on social media, but the data shows they’re a risky choice for retirement. I guide my clients toward proven options like Roth IRAs or a Mega Backdoor Roth: simpler, safer, and better aligned with their retirement goals.
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Disclosure: This article is for educational purposes only and does not constitute personalized investment advice. Past or simulated performance is not indicative of future results. Outcomes may vary depending on individual circumstances. The author has no financial relationship with HonestMath.com.
