Where Indexed Universal Life Fits for High Earners

A high-income earner can save diligently for decades and still face a tax problem in retirement: Most of their savings could be concentrated in accounts in which withdrawals are taxed as ordinary income, with limited flexibility to manage those taxes.

Direct Roth eligibility may have phased out years earlier.

Indexed universal life insurance, or IUL, can address part of that issue. It provides a death benefit, while its cash value could create a supplemental source of money later in life.

For people who have maxed out traditional tax-advantaged accounts and want more control of retirement income sources, IUL might deserve a closer look.

Cash value grows tax-deferred inside the policy, and the owner could later access it through withdrawals and policy loans that are generally not subject to current income tax. This only works if the contract is properly structured and stays in force.

That combination of tax-deferred growth and potentially tax-advantaged access is what differentiates IUL from other retirement savings vehicles.

LIMRA (the Life Insurance Marketing and Research Association) reported record IUL premiums in 2025, up 17% from the prior year. Growing sales do not by themselves establish that a product is appropriate for any client. Still, they show increasing interest in how permanent life insurance might fit into a modern financial plan.

High earners run out of familiar tax-advantaged space

The issue becomes more visible during peak earning years. For 2026, employees can contribute up to $24,500 to a 401(k), excluding catch-up contributions. Direct Roth IRA eligibility phases out from $153,000 to $168,000 for single filers and from $242,000 to $252,000 for married couples filing jointly.

Those limits are not an automatic reason to buy life insurance. Consider workplace plans, health savings accounts, backdoor Roth strategies, taxable investments and adequate liquid reserves first. Still, a high earner with surplus cash flow and a legitimate need for permanent insurance might have room for another layer.

Cash value can add another retirement-income layer

An IUL policy builds cash value and credits interest partly based on the performance of an external index. The money is not invested directly in that index. Caps, participation rates, spreads, guarantees and policy charges determine how much interest is credited.

Growth inside the policy is tax-deferred. The owner can later access cash through withdrawals and policy loans, potentially without current income tax if the contract is properly structured, avoids modified endowment contract status and stays in force. That access might supplement qualified-plan distributions, Roth withdrawals, taxable investments and guaranteed income from annuities.

This additional income source might help during a high-tax year, after a market decline or before tapping another retirement asset. Tax flexibility is a key argument for IUL. The policy doesn't need to replace a retirement account to contribute meaningfully.

The right buyer needs more than a high income

The strongest candidates for an IUL tend to share several characteristics:

• They are typically from ages 40 to 55 and have time to fund the policy before taking income.
• They have stable surplus cash flow after addressing other retirement priorities and liquidity needs.
• They need permanent life insurance for family, estate or business reasons.
• They understand that early surrender can be expensive, and a long-term time horizon is part of the strategy.

Someone with inconsistent income, limited reserves, a short time horizon or no insurance need likely requires a different solution. IUL might work best when both sides of the contract matter: protection for beneficiaries and carefully managed access to income for the policyowner.

Tax advantages don't remove policy risk

Loans accrue interest and reduce cash value and the death benefit. A policy that's been heavily borrowed from can lapse, potentially creating taxable income at an unfavorable time. Policy charges continue, interest-crediting terms can change, and illustrated results are not guaranteed.

Prospective policyowners should review lower crediting assumptions, changing policy terms, interrupted premiums and rising loan balances before committing.

The NAIC's life insurance illustration guidance helps frame that review. AI-enabled planning tools can quickly compare funding and loan scenarios. Still, they can't determine whether the death benefit is necessary or whether the owner can sustain the policy for decades. Regular human review and current in-force illustrations still matter.

Decide what the next dollar needs to do

For financial advisers, at the next review with a high-income earner, map the tax treatment of their existing retirement assets. Then ask where the next long-term dollar should go and what job it needs to perform.

If traditional savings options are already addressed, permanent coverage is needed and another potential source of tax-advantaged money might strengthen the income plan, compare an IUL with the available alternatives. Use conservative projections, explain the conditions plainly, and build annual reviews into the recommendation.

Life insurance is designed to protect people after a death. For the right high-income earner, a properly designed IUL policy might also support decades before that.

Related Content

• What Is Indexed Universal Life Insurance and How Does It Work?
• Which Type of Life Insurance Is Right for You?
• As You Plan for Retirement, Also Prepare for the Unexpected
• Do You Need Life Insurance in Retirement?
• Are You Putting Yourself Last? The Cost Could Be Your Retirement Security

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.