Is IUL a Scam? Yes.

I won’t bury the lead. If you invest $200/month for 40 years, this is how much you’ll end up with.

  • In an Indexed Universal Life (IUL) insurance policy: $320,701
  • In an index fund: $1,797,311

An IUL policy is likely to erode 82% of your wealth compared to investing directly in an index fund. How do I know this? Because I bought one, read every page of the policy, and did the math.

I have been seeing a rash of insurance salesmen on social media representing their insurance products as investments. They ignore the death benefit (the insurance part of an IUL insurance policy) and instead talk about the amazing compound growth, tax benefits, unlimited banking, retirement income, etc.

After seeing these social media posts, I clicked on one of their links in bio and set up a meeting. I was on two different zoom sales calls that lasted about 90 minutes in total. I recorded them in their entirety. They pitched me the product, I gave them all my info, and I bought it. For what it’s worth, the policy I bought was through World Financial Group (WFG) which is an insurance MLM and they sold me an Transamerica policy. The policy I purchased is typical of every other one I have ever seen.

Below I’ll detail the lies they told, and the truth behind the math.

Lie #1: They Ignore The Existence of Dividends

Pretty much every IUL pitch you’ll see eventually will have a chart like the one below. This came directly from the policy I purchased.

YearS&P 500 Index IUL 0.75% Floor and 13.75% cap
2002-23.37%0.75%
200326.38%13.75%
20048.99%8.99%
20054.69%4.69%
200611.65%11.65%
20073.65%3.65%
2008-38.49%0.75%
200923.45%13.75%
201012.78%12.78%
20111.54%1.54%
201211.68%11.68%
201329.60%13.75%
201411.39%11.39%
2015-0.73%0.75%
201610.46%10.46%
201719.40%13.75%
2018-7.01%0.75%
201928.88%13.75%
202016.26%13.75%
202126.89%13.75%
20 Year Average7.38%8.67%
Chart from an IUL policy that ignores the existence of dividends paid by the S&P 500

Upon first glance, this makes the IUL look pretty good. No downside risk, higher overall return. As far as investing goes, those are both good things. But with all good cons, there’s a morsel of truth hidden in the big lie. IULs always compare their “index interest” to the change in share price of the index, but they ignore dividends. i.e. If you buy an index fund you don’t get the 7.38% return shown on the left. You get that return PLUS all of the dividends paid to you in cash (which can then be reinvested to amplify your total growth). Here’s the same chart with a third column showing the actual total return of an S&P 500 investment:

YearS&P 500 Index ChangeIUL 0.75% Floor and 13.75% capS&P 500 Total Return with Dividends reinvested
2002-23.37%0.75%-22.10%
200326.38%13.75%28.68%
20048.99%8.99%10.88%
20054.69%4.69%4.91%
200611.65%11.65%15.79%
20073.65%3.65%5.49%
2008-38.49%0.75%-37.00%
200923.45%13.75%26.46%
201012.78%12.78%15.06%
20111.54%1.54%2.11%
201211.68%11.68%16.00%
201329.60%13.75%32.39%
201411.39%11.39%13.69%
2015-0.73%0.75%1.38%
201610.46%10.46%11.96%
201719.40%13.75%21.83%
2018-7.01%0.75%-4.38%
201928.88%13.75%31.49%
202016.26%13.75%18.40%
202126.89%13.75%28.71%
20 Year Average7.38%8.67%9.52%
Chart updated to include reinvesting dividends paid by the S&P 500

So an index fund does indeed have a higher return even in this example. But these numbers are not what the IUL actually returns. We haven’t even gotten started yet.

Lie #2: Cherry Picked Timeframe

The time frame of the above happens to start with the dotcom crash, then go shortly into the financial crisis. An early crash is an ideal timeframe to cherry pick this kind of product. Below is the actual chart shown to me during the sales pitch in 2022. It covers a 15 year time frame from over 10 years ago that just happens to be conveniently centered on the “lost decade” that contained two of the biggest market crashes in the last 100 years.

Actual chart shown to me an IUL sales pitch in 2022 that includes a 10 year old time frame. (Note that these numbers are lies)

If we revisit the 20 year timeframe shown in my policy and extend it look back 40 years, this is what you get:

  • 1982-2021 S&P 500 IUL 0.75% floor and 13.75% cap: 8.80%
  • 1982-2021 S&P 500 Total return: 12.35%

Over this time period, the IUL underperforms by over 3.5% annually, which is devastating to any investment. But unfortunately for anyone who owns an IUL policy, the cash value will never actually grow at even these rates or what the green line above shows. That’s because these return numbers don’t include the impact of the fees.

Lie #3: The Fees. The Fees. My God, the Fees

At no point during the 90 minute sales pitch were the fees of this policy even mentioned. I’ve never seen a tiktok or instagram post from an IUL salesman which even comes close to an explanation of the fees. But I read every page of the policy, so I’ll break down for you the fees when you pay into an IUL product:

  • Premium Expense Charge: 6%. This is immediately taken out of the premium you pay. 
  • Monthly Policy Fee: $12. Just like it sounds, you pay this month per month no matter what.
  • Per Unit Charge: $0.59/Month. A “unit” is usually $1,000 in death benefit coverage. The policy I bought had a $100,000 death benefit. That means I had 100 units and was getting charged another $59/month just for having this policy. And this is just a fee. It doesn’t even cover the actual cost of insurance explained below.
  • Surrender Charge: Starts at $24.91/Unit and starts dropping at year 11 until it’s gone after year 16. This means that if you want your money back before 16 years, you have to pay yet another fee. This generally means that you can’t get ANYTHING back for the first several years (four in my case) and if you stop paying monthly or decide to cancel your policy you lose everything.
  • Index Account Charge: 0.06%/month. AFTER all of the fees above plus cost of insurance are taken, then THIS fee is assessed to the remaining cash value. 0.06%/month doesn’t sound bad, but that’s about 0.72% per year.

If you were to buy an index fund through a reputable brokerage like Vanguard, Fidelity or Schwab, all of these fees would be ZERO except for the “expense ratio” of the index fund which works similarly to the “Index Account Charge” above. But instead of 0.72% per year, that fee in the Vanguard 500 ETF for example would be 0.03% per year, 24X lower.

But wait, there’s more. We haven’t even paid for the insurance part of this insurance policy yet.

Lie #4: The cost of insurance

When insurance salesmen are pushing these IUL products, they rarely mention the actual death benefit which is supposed to be the point of life insurance. (In fact, by law there has to be a significant death benefit at your cost for them to even sell these as life insurance). The death benefit is real. If you were to meet your unfortunate early demise, it would pay out. But the marketing of these policies as superior investments fails to include the erosion of investment value due to the ever increasing cost of insurance. This monthly cost never goes away, even if you don’t have a need for life insurance (for example when your dependents are self-sufficient or your investments have grown to a level where additional insurance is unnecessary). 

So how much does the insurance cost? In my policy it was several pages of numbers based on gender, age, and smoking status. But here’s a few examples from my policy with a $100,000 death benefit:

AgeMale non-smokerFemale non-smoker
20$7.08$2.67
30$4.50$3.42
40$12.17$8.58
50$19.41$12.08
60$41.41$30.83
70$116.67$78.91
Examples of monthly cost of insurance for a $100,000 death benefit

In addition to all the fees above, your “cash value” will also have these amounts taken out each month to cover the cost of insurance. Which leads us to the big lie:

Lie #5: The Big Lie: The cash value in the IUL policy will outperfo