Interest rates

Index-linked universal life (IUL) adapts to inflation and high interest rates

High Interest Rates Boost Cash Value Life Insurance Market Growth

The forecast for a recession in the United States in the year has reached 100% »


BOULDER, CO, USA, Nov 19, 2022 / — High bond interest rates accompanying currently high inflation allow for further growth in the cash value of index-linked universal life (IUL) policies. This can bring peace of mind to IUL policy owners worried about inflation, recession and stock market crashes.

Cash life insurance, especially IUL, is a well-known alternative asset class. It offers a wide range of potential benefits.

Summary of benefits of LUI
• a death benefit available immediately (in the event of premature death)
• Immediately available living benefit options (for example, for a chronic, critical or terminal illness)
• tax-free market linked growth, linked to (but not invested in) one or more selected market indices
• risk-free growth in policy value via a 0% “floor” (no exposure to negative market returns)
• potential protection against inflation
• tax-free lifetime income (via policy loans repaid with death benefit proceeds)
• non-taxable income protects against the risk of rising tax rates
• non-taxable income avoids a high tax bracket for other taxable income
• non-taxable death benefit
• asset protection (varies by state) for the life of the insured
• elimination of all taxes and protection of assets, forever, when held in a dynasty trust

Thus, IUL can provide good growth and tax-free income in the form of policy loans, while the 0% floor effectively eliminates the risk of losses in the event of a market downturn. For example, although the S&P is currently down 17% year-to-date, IUL’s cash values ​​are protected against market losses. What about inflation and high interest rates?

Interest rates and options budget

Cash value growth is “linked” to one or more market indices, but the cash value of the policy is not directly invested in the markets. This risk-free growth is achieved by investing most of the policy’s current cash value in fixed-income vehicles, typically corporate bonds, at a guaranteed fixed rate of interest. This generates a known yield, guaranteeing the preservation of the starting cash value (i.e. 0% floor). The insurance company uses the cash value balance, the options budget, to purchase stock index options. If a stock index rises during a credit period, then options are exercised, increasing the cash value. If an index falls, options are allowed to expire, but the starting cash value has been protected (0% floor). Clearly, when corporate bonds pay higher interest rates, less of the current cash value needs to be invested in bonds to secure the 0% floor, and more cash is available in the options budget to invest in index options. This increases the potential for cash value growth (in the form of higher caps and higher participation rates). In other words, higher interest rates mean more potential cash value growth. The reverse is also true: when corporate bond yields fall, option budgets shrink and potential growth in cash value declines. There are, of course, lags in these processes as insurance companies only replace lower-yielding bonds in their investment portfolios with higher-yielding bonds (and vice versa) gradually (measured in months). .

Inflation, IUL and Interest Rates

Inflation erodes the cash value of the IUL policy as well as the actual value of policy loans and death benefits. In an effort to fight inflation, during 2022 the US Federal Reserve raised interest rates from near zero to 4+%, pushing corporate yields up to 5+%. Further increases are expected before the end of 2022. For now, therefore, the high interest rate environment has enabled insurance companies to increase IUL option budgets and therefore potential cash value growth. Of course, as described below, interest rates don’t always keep up with inflation. In fact, the Fed could lower interest rates if the US economy fell into a deep recession.

IUL in today’s uncertain economy

The forecast for a recession in the United States within the year has reached 100%, reported on October 17, 2023. “Right now the market is going down – it could be 30%, 50%, it could be 60%, 70%. .until we have a real pivot and/or we have an inflation rate below 4%”, warns fund manager Michael Pento. And former institutional fund manager Alf Peccatiello predicts“If today the Fed goes to 5%, stays there for a year, you are guaranteed to see massive damage to the real economy, and you are guaranteed to see a recession. Over the past 100 years, every recession in the United States succeeded in lowering inflation… by 7 points on average.” Thus, in the short term, experts predict a recession and further stock market declines. However, when the recession worsens, the Fed will likely turn to lower interest rates to stimulate the economy. The resulting decline in corporate bond yields would inevitably reduce option budgets and lead to lower caps and participation rates (less growth in cash value). The 0% floor protects the cash value of the policy, in any event, against sharp stock market declines. Additionally, a sharp drop in a market index sets the stage for a big positive rebound in a future credit period.


IUL is a useful, yet underutilized, alternative asset class that protects capital against market downturns and enjoys substantial, tax-free growth during positive market years, and additionally provides income and a tax-exempt death benefit. A high interest rate environment increases the cash value growth potential of IUL, which helps offset the damage caused by inflation.

Thomas Swenson, J.D.
Shoreview LLC
+1 303-442-3100
[email protected]
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