Unlike traditional whole life or guaranteed universal life policies, Indexed Universal Life (IUL) policies credit interest based on the performance of a stock market index, such as the S&P 500 or a custom “engineered” index. While policyholders are shielded from direct market losses through contractual crediting floors, the method of crediting interest is complex. Caps, participation rates, and policy charges can all reduce credited interest—and, over time, these limits and expenses can erode cash value, trigger losses, or even cause the policy to lapse if not carefully monitored and funded.

Suitability issues often arise because:

• Complexity: Many buyers don’t fully understand how caps and floors impact long-term performance.

• Illustrations: Sales presentations may project overly optimistic returns.

• Premium Flexibility: While flexible premiums are a selling point, underfunding an IUL can cause the policy to lapse unexpectedly.

• Hidden Costs: Mortality charges, policy fees, and cost-of-insurance (COI) increases can erode value over time.

• Insurer Discretion: Perhaps the biggest risk—very few levers in an IUL are truly guaranteed. Insurers have wide discretion to change crediting rates, caps, participation rates, and internal charges, sometimes with little warning. This discretion can dramatically affect policy performance in ways the policyholder cannot control.