Unlike Whole Life insurance which offers stable return (for example, 6% return with verifiable historic data), IUL's return is tied to equity index performance, which is not guaranteed (even though IUL does offer 0% floor protection), in other words, IUL policy owners bear the risks, therefore they are rewarded with lower premiums.
Like any life insurance products that offers cash accumulation, IUL's cash accumulation is tax-deferred (and could be tax-free in distribution phase as well if structured properly).
Of course, like any permanent life product, IUL's death benefit is tax free for the beneficiaries.
The policy owner controls the risks level, for example, if one does not want to take higher risks, he or she can allocate the entire cash value to fixed account and earn a fixed return (for example, 3%). But most IUL owners allocate money fully into the equity index account with the downside protection (typically 0% guaranteed) while enjoy upside of the equity market because over a long period of time, the equity market always goes up.
In our next blog post, we will discuss the downsides of IUL.
To truly understand the benefits of the IUL product, it's best to run it against an investment alternative and see which one generates higher cash value, after all the expenses.