Index Universal Life Insurance Hypothetical Illustrations
A. Let me walk you through a simple, hypothetical illustration of an Indexed Universal Life Insurance (IUL) policy for a newborn (0 years old).
**Disclaimer: This is just a simplified example. Real IUL illustrations are based on carrier-specific assumptions, detailed charges, and index performance. But this will give you a clear idea of how the cash value and death benefit could grow over time.
Assumptions:
| FN | LN | Phone Number | |
| Lobel Martin | M | +1 (502) 439-0003 | |
| Durbin Joseph | J | +1 (270) 597-6361 | |
| Lyons Carolyn | C | +1 (270) 991-5302 | |
| Martin Larry | LN | +1 (270) 779-8801 | |
| Kielczewski Rachel | R | +1 (270) 303-9592 |
Hypothetical Growth Table:
| Age | Annual Premium | Cash Value (End of Year) | Death Benefit |
|---|---|---|---|
| 0 | $3,000 | $0 | $250,000 |
| 5 | $3,000 | ~$15,500 | $250,000 |
| 10 | $3,000 | ~$38,000 | $250,000 |
| 15 | $3,000 | ~$65,000 | $250,000 |
| 20 | $3,000 | ~$100,000 | $250,000 |
| 25 | $3,000 | ~$145,000 | $250,000 |
| 30 | $3,000 | ~$200,000 | $250,000 |
| 35 | $3,000 | ~$270,000 | $250,000 |
| 40 | $3,000 | ~$355,000 | $250,000 |
Key Takeaways:
-
The policy begins with a fixed death benefit of $250,000.
-
Cash value grows steadily, thanks to the index-linked crediting with a floor of 0% and a cap of 10%.
-
At age 20 or 30, the policyholder can begin taking tax-free loans or withdrawals for college, a down payment on a house, or retirement.
-
As long as the policy is funded and properly managed, the death benefit remains intact even if the cash value is accessed.
This is a great example of why parents and grandparents often start an IUL early for a child — the long time horizon gives the cash value years to compound, and the child has lifelong coverage with the flexibility to use the cash later in life for major expenses.
B. Let’s draft a new illustration using Option B (Increasing Death Benefit) for an Indexed Universal Life Insurance (IUL) policy, still for a newborn (0 years old).
Quick Recap: Death Benefit Options
-
Option A (Level) — Death Benefit stays the same unless adjusted.
-
Option B (Increasing) — Death Benefit = Original Face Amount + Cash Value
(So as cash value grows, the death benefit rises too!)
Assumptions:
| Factor | Value |
|---|---|
| Age of Insured | 0 (newborn) |
| Policy Type | Indexed Universal Life (IUL) |
| Premium Amount | $250/month ($3,000/year) |
| Index Crediting Rate | 7% average (hypothetical) |
| Cap Rate | 10% |
| Floor Rate | 0% |
| Death Benefit Option | Option B (Increasing) |
| Initial Death Benefit | $250,000 |
Hypothetical Growth Table (Option B)
| Age | Annual Premium | Cash Value (End of Year) | Death Benefit |
|---|---|---|---|
| 0 | $3,000 | $0 | $250,000 |
| 5 | $3,000 | ~$14,800 | ~$264,800 |
| 10 | $3,000 | ~$36,500 | ~$286,500 |
| 15 | $3,000 | ~$62,500 | ~$312,500 |
| 20 | $3,000 | ~$96,500 | ~$346,500 |
| 25 | $3,000 | ~$140,000 | ~$390,000 |
| 30 | $3,000 | ~$195,000 | ~$445,000 |
| 35 | $3,000 | ~$260,000 | ~$510,000 |
| 40 | $3,000 | ~$340,000 | ~$590,000 |
Key Differences with Option B:
-
As the cash value grows, the death benefit automatically increases — providing more protection for your beneficiaries without needing to purchase extra coverage.
-
This option is excellent for creating a growing legacy or helping offset inflation over time.
-
If at some point the policyholder no longer needs the growing death benefit, they can switch back to Option A to lower costs and stabilize the coverage.
-
When cash value gets large, the death benefit could be nearly double the original amount — a big advantage if the goal is to leave behind wealth.
Why Choose Option B for a Child?
-
More wealth transfer potential for the same premium.
-
Allows the policy to grow with the child’s life and financial needs.
-
Enhances living benefits like loans, withdrawals, and retirement income, while simultaneously boosting the death benefit.
C. Using an IUL for college funding is one of the most popular real-world uses!
Let’s sketch out a sample scenario for the same Indexed Universal Life (IUL) policy with Option B (Increasing Death Benefit), where the insured (child) takes a loan at age 19 to help pay for college.
Policy Assumptions:
| Factor | Value |
|---|---|
| Age of Insured | 0 (newborn) |
| Policy Type | Indexed Universal Life (IUL) |
| Premium Amount | $250/month ($3,000/year) |
| Index Crediting Rate | 7% average (hypothetical) |
| Cap Rate | 10% |
| Floor Rate | 0% |
| Death Benefit Option | Option B (Increasing) |
| Initial Death Benefit | $250,000 |
Loan Scenario:
At age 19, the policyholder takes out a tax-free loan of $40,000 for college tuition.
Projected Policy Values With Loan:
| Age | Premium Paid To-Date | Cash Value (End of Year) | Death Benefit | Loan Balance |
|---|---|---|---|---|
| 18 | $54,000 | ~$88,000 | ~$338,000 | $0 |
| 19 | $57,000 | ~$51,500 (after $40K loan) | ~$301,500 | $40,000 |
| 20 | $60,000 | ~$59,500 | ~$309,500 | ~$41,200 (interest accrues) |
| 25 | $75,000 | ~$103,000 | ~$353,000 | ~$44,500 (if unpaid) |
| 30 | $90,000 | ~$158,000 | ~$408,000 | ~$48,000 (if unpaid) |
Key Points:
-
At age 19, the policyholder borrows $40,000 tax-free for college.
-
The death benefit decreases temporarily because the loan reduces the net protection until repaid.
-
Even if the loan isn’t repaid, the remaining death benefit is still substantial.
-
The cash value continues to grow even while the loan is outstanding, based on the full account value (often the insurance company credits interest on the original cash value, not the loan-adjusted value).
-
Policy loans are typically low interest compared to private loans or federal student loans and do not require credit checks.
-
The flexibility of this strategy allows the policyholder to repay the loan on their own schedule or not at all — the loan is ultimately deducted from the death benefit.
Why This Is Smart for College:
-
No FAFSA impact — policy cash values and loans don’t typically count against federal financial aid.
-
No taxes on withdrawals if structured as a loan.
-
Builds lifelong coverage even while using funds for education.
-
Acts as a private, self-created “bank” for future financial needs beyond college.