The Risk of Lapse in Indexed Universal Life (IUL): Beyond the 0% Floor
While Indexed Universal Life (IUL) promises protection with a 0% floor, policyholders must be aware that the 0% floor only protects the cash value from investment losses. The policy can still lapse, even if the index performs well, due to internal expenses.
The Two Threats to IUL Solvency
- **Increasing Cost of Insurance (COI):** The monthly COI charge increases every year as the insured ages. In later life, this charge can become substantial.
- **Low Net Growth:** Even if the index performs positively, the policy’s growth may be limited by the Cap Rate. If the net growth (after the Cap) is less than the internal COI and administrative fees, the cash value will slowly decline.
If the cash value is depleted, the policy lapses. This risk is amplified if the policyholder consistently pays only the minimum premium, as the cash value reserve is not large enough to sustain the escalating COI in old age.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. IUL policies require annual performance reviews and proper funding to mitigate the risk of lapse in later years.