5 IUL Red Flags to Watch for Before You Sign

The biggest IUL red flags are simple to spot once you know them: promises of "guaranteed" or "risk-free" growth, illustrations that only show the rosiest scenario, a premium you can't comfortably keep paying, and pressure to pull money from your 401(k) or an existing policy to pay for it. If you see any of these, slow down and ask more questions before you sign.

Indexed universal life (IUL) can be a useful tool for the right person. But it's a long-term, complex contract, and a poorly designed or poorly explained policy can cost you. As a licensed agent here in Georgia who sells IUL, I think you deserve to know what to watch for.

Key takeaways

• IUL is life insurance with cash value, not a guaranteed investment. Be wary of anyone who says otherwise.
• Always ask for the guaranteed column of an illustration, not just the projected one.
• Underfunding is one of the most common reasons policies struggle or lapse.
• Pulling money from a 401(k) or replacing an existing policy to buy IUL can create taxes, penalties and new surrender charges.
• You can verify any Georgia agent's license on the Georgia Office of the Commissioner of Insurance and Safety Fire website.

IUL red flag #1: "Guaranteed," "no risk" or "tax-free" with no fine print

IUL cash value is credited based on an index, subject to caps or participation rates. Many policies have a floor that keeps index credits from going below zero, but that is not the same as "no risk." Policy charges come out every month, whether the index is up or not, so your cash value can go down.

The same goes for "tax-free." Policy loans are generally income-tax-free only when the policy is properly structured, funded, kept in force, and is not a modified endowment contract (MEC). If the policy lapses with a loan outstanding, you may owe tax on the gain. Anyone skipping those qualifiers is not giving you the full picture.

Red flag #2: The illustration only shows the best case

A sales illustration shows both guaranteed values and non-guaranteed, projected values. The National Association of Insurance Commissioners (NAIC) notes that non-guaranteed elements, like projected cash values, can change. Regulators have tightened IUL illustration rules over time through Actuarial Guideline 49-A, but an illustration is still a projection, not a promise.

What to ask for:

• The guaranteed column. What happens to the policy if only the guarantees apply?
• An illustration at a lower assumed crediting rate than the one shown. Does the policy still stay in force?
• A year-by-year view of charges, not just the ending values at age 90.

If an agent won't show you a more conservative version, that's a red flag in itself.

Red flag #3: A premium you can't keep paying (or a design that's underfunded)

IUL works best when it is funded consistently for many years. Two design problems show up again and again:

• The premium is too high for your budget. If you have to stop paying in year three, surrender charges and early costs can eat much of what you put in.
• The premium is set at the bare minimum. A low premium can look attractive, but if it barely covers rising insurance costs, the cash value may never build, and the policy could lapse later in life when you need it most.

Be extra careful with "premium financing" pitches, where a lender pays your premiums. Loan interest, collateral calls and changing rates add real risk. It's not free insurance.

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Red flag #4: Pressure to move money from your 401(k) or an existing policy

Some pitches suggest cashing out a 401(k) or IRA to fund an IUL. Withdrawals from a traditional 401(k) are generally taxable income, and taking money out before age 59½ can also trigger a 10% additional IRS tax unless an exception applies. You would also give up any employer match on future contributions if you stop saving in the plan.

Replacing an existing life insurance policy or annuity deserves the same caution. A new policy usually means a new surrender period, new charges, and possibly new medical underwriting. Replacement is sometimes the right move, but you should see a clear written comparison first. For more on where a 401(k) and IUL each fit, read IUL vs. 401(k): Which Makes Sense for Georgia Families?

Red flag #5: Nobody explains the costs, loans or lapse risk

Before you sign, you should understand, in plain English:

1. What the policy charges are, and how they change as you get older.
2. How long the surrender period lasts and what you'd get back if you cancel early.
3. How policy loans work, what interest rate applies, and what happens if loans grow too large.
4. How the policy avoids becoming a MEC.
5. Which riders are included and what each one costs.

If you get vague answers, or you're told "don't worry about that," walk away. I'll go deeper on loans in How IUL Policy Loans Work (and How They Can Go Wrong).

Bonus check: Is the agent licensed in Georgia?

Anyone selling life insurance in Georgia must be licensed. You can look up an agent on the Georgia Office of the Commissioner of Insurance and Safety Fire license lookup at oci.georgia.gov. My license number is 3784707, and you're welcome to check it.

Who IUL is not for

Being honest about fit is part of avoiding a bad policy. IUL is usually not the right choice if you:

• Only need coverage for a set number of years, such as until the kids are grown or the mortgage is paid off. Term life is often a better fit.
• Don't have an emergency fund or are carrying high-interest debt.
• Aren't yet getting your full employer 401(k) match.
• Can't commit to funding the policy consistently for many years.

Frequently asked questions

Can you lose money in an IUL?

Yes. Even with a 0% index floor, monthly charges, fees and surrender charges can reduce your cash value, especially in the early years or if the policy is underfunded.

Is IUL a scam?

No. IUL is a legitimate, state-regulated insurance product. Problems usually come from poor design, underfunding, or sales pitches that overpromise. It fits some people well and others poorly.

What should I ask to see in an IUL illustration?

Ask for the guaranteed values, a version at a lower assumed rate, and a year-by-year breakdown of charges and surrender values.

How do I check if an insurance agent is licensed in Georgia?

Use the agent search on the Georgia Office of the Commissioner of Insurance and Safety Fire website, oci.georgia.gov.

Already have an IUL proposal on the table, or a policy you're not sure about? I'm happy to give you a second set of eyes, including telling you if IUL isn't the right fit.

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Tai Nguyen is a licensed life insurance agent in Georgia (License #3784707, NPN 21496686). This article is for educational purposes only and is not tax, legal, or investment advice. Consult a qualified tax professional about your situation. Insurance and annuity guarantees are backed by the claims-paying ability of the issuing insurance company. Annuities and life insurance are not FDIC insured. Retire With Tai serves Georgia residents only.