What They Promised You Versus What Really Happens When the Loans Begin, the Index Lags, and the Policy Starts to Collapse
The Sales Pitch: Tax-Free Retirement, Market Gains Without Loss, and Minimal Premium Payments
For years, life insurance agents and promoters have been selling Indexed Universal Life (IUL) policies using a powerful narrative:
“Make premium payments for five to seven years. Then use policy loans to generate tax-free retirement income. No more premiums, no taxes, and no market risk. You get a tax-free stream of income for life and a legacy for your heirs.”
It sounds like the ultimate retirement solution. But in reality, IULs are insurance products, not retirement plans. When used to replace legitimate retirement savings strategies, they are fragile, expensive, and prone to failure.
At RP Legal LLC, we have reviewed hundreds of IUL policies sold under this exact promise. We have represented professionals, retirees, and business owners who relied on misleading illustrations and unrealistic financial assumptions. This article explains why these policies fail, how the structure unravels, and what legal remedies may be available to those who were misled.
How Indexed Universal Life Is Presented as a Retirement Plan
The IUL retirement strategy typically follows four stages:
- Funding Phase – Clients are told to pay premiums for five to seven years, often contributing between fifty thousand and one hundred fifty thousand dollars annually.
- Accumulation Phase – The policy is illustrated to grow at a fixed interest rate tied to a market index. Credit rates are often projected between six and seven percent.
- Distribution Phase – Clients are told they can start borrowing tax-free income against the cash value through policy loans, sometimes as early as year two.
- Self-Sustaining Phase – Clients are told that the policy will fund itself indefinitely with no more premiums required.
These illustrations are created by the insurer, but they are based on assumptions—not guarantees.
Why Indexed Universal Life Policies Fail When Used for Retirement
1. The Income Is Not Income. It Is a Loan
What is sold as tax-free income is actually a loan from the insurance company secured by your own policy’s cash value. These loans:
- Accrue interest every year
- Reduce both the death benefit and cash value
- Must be serviced or repaid from future policy performance
Over time, the loan grows. If policy returns do not exceed loan interest and internal charges, the debt compounds and destabilizes the policy.
2. Credit Rate Assumptions Are Unrealistic
IUL projections often assume index crediting of six to seven percent. However:
- Cap rates have declined across the industry, often below eight percent
- Participation rates may be reduced at the carrier’s discretion
- Market volatility suppresses returns in “volatility controlled” accounts
- Asset-based and administrative charges are deducted before interest is applied
A shortfall of even one percent from the illustrated return can cause long-term failure of the income plan.
3. Internal Charges Quietly Erode Policy Performance
Every month, your policy deducts the following:
- Mortality and cost of insurance charges
- Fixed policy administration fees
- Loan interest (after distributions begin)
These deductions occur before the index credits interest. Even in good years, net returns are significantly lower than the illustrated assumptions. In bad years, the charges may completely offset policy gains.
4. The Loan Spiral Turns the Policy into a Debt Engine
This is where most retirement strategies fall apart. Here is how it happens:
- Income begins through policy loans around year ten or twelve
- Index returns underperform projections
- Loan interest begins to accumulate faster than new growth
- The cash value declines and cost of insurance rises
- The loan balance overtakes the remaining policy value
- The policy lapses and triggers a taxable event on phantom gains
This progression is referred to by product analysts as a “slow-motion lapse.” It is common, and in many cases, entirely avoidable, if the client had been told the truth at the outset.
5. The “Pay for Five Years” Model Fails in the Real World
One of the most dangerous marketing claims is that you will only need to fund the policy for five years. This is only possible if every projected assumption holds perfectly, including:
- Full and timely funding
- Constant cap rates
- Zero increase in internal charges
- High and consistent index performance
In reality, none of these conditions are guaranteed. In many of the cases we litigate, clients receive unexpected premium notices ten to fifteen years after policy issue. These notices demand tens of thousands of dollars just to keep the policy from collapsing.
6. There Is No Fiduciary Duty or Oversight in Most Sales
Indexed Universal Life policies are not securities. That means:
- They can be sold by licensed insurance agents without financial planning credentials
- They are not governed by SEC or FINRA suitability standards
- Sales materials can use aggressive and misleading projections as long as they comply with flexible illustration rules
As a result, clients are often presented with financial plans that appear highly sophisticated, but are actually built around assumptions, not facts. When challenged, these sales presentations fall apart in discovery and deposition.
RP Legal LLC: National Leaders in IUL Litigation
With nearly a decade of deep experience in this field, the lawers at RP Legal LLC have:
- Litigated against leading IUL carriers including Pacific Life, Minnesota Life, National Life, Allianz, and others
- Recovered tens of millions of dollars for clients misled by IUL retirement marketing
- Represented over four hundred victims of IUL collapse, underfunding, and misrepresentation
- Won a trial verdict in one of the country’s most complex IUL disputes
We understand the legal theories, the financial modeling, and the strategic misrepresentations better than anyone in the industry.
What to Do If You Were Sold an IUL as a Retirement Plan
Request a Policy Review
We will compare your original illustration to actual policy performance, evaluate the sustainability of your loan schedule, and assess whether your policy is structurally failing.
Explore Legal Options
If you were told your premiums would end after five years, that your income would be guaranteed, or that your policy would never lapse, you may have been misled. You may have a claim for rescission or recovery.
Take Action Before Lapse
Once a policy collapses, the damage is done. You may be hit with a large tax bill and have no death benefit left. Early intervention gives you the best chance to preserve value or recover what was lost.
A Life Insurance Policy Is Not a Retirement Plan
Indexed Universal Life is not a guaranteed retirement solution. It is a complex insurance contract with rising internal costs, volatile performance, and an unstable loan mechanism that often fails under pressure.
If your financial future was built around an IUL, and you are now seeing rising loan balances, lower returns, or unexpected premium demands, you are not alone—and you are not without options.
RP Legal LLC is the national authority on IUL litigation. Let us help you understand your rights and recover what you were promised.
Request your policy analysis today.