Comparison Last reviewed: 2026-10-03 Part of Comparisons

IUL vs Investing in the S&P 500

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

Verdict: they are not the same kind of thing. Money in an S&P 500 index fund owns the market, with its losses, its full upside and its dividends, at very low cost. An IUL credits interest linked to the index's price change, with a floor and a cap, after paying for life insurance. In a year like 2008 (S&P 500 total return about -37%) the IUL credits 0%; in a strong year it credits only up to the cap. If you need the death benefit, an IUL can fit next to index funds; it is not a replacement for them.

Real years, hypothetical crediting

How a floor and cap change the market's path

Year	S&P 500 total return	Hypothetical IUL credit (0% floor, 10% cap)	Note
2008	-36.55%	0%	Floor holds; charges still come out
2022	-18.04%	0%	Floor holds
A +6% year	+6%	about +6% minus dividends	Index credits use price return, not dividends
A +25% year	+25%	10%	Cap limits the credit

S&P 500 total returns from Damodaran data (2022). Hypothetical. Not an illustration of any specific policy. Not a quote. IUL index accounts generally track the price index, which excludes dividends; crediting methods vary by contract. Past index performance is not indicative of future results.

Two things the table makes visible. First, the floor matters most in exactly the years that hurt retirees: 2008 and 2022. Second, the cap and the missing dividends matter in all the other years, which are most of them. That is why a fair comparison is never about "average returns"; illustrations are capped by regulation (AG 49-A) for the same reason (NAIC AG 49-A).

What else differs

Index fund vs IUL

	S&P 500 index fund	IUL
Cost	Index equity funds averaged 0.05% (mutual funds) and 0.14% (ETFs) in 2025	Cost of insurance, loads and fees, highest in early years
Taxes (taxable account)	Dividends taxed yearly; long-term gains at capital gains rates; step-up at death	Deferred; loans and basis withdrawals generally not taxed if not a MEC and in force
Death benefit	None	Generally income-tax-free to beneficiaries
Liquidity	Daily	Surrender charges for 10 to 15+ years

Fund costs: ICI, March 2026.

Free comparison

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When an IUL makes sense next to index funds

You need permanent life insurance anyway, so the cost of insurance is buying something you want.
You have already used the 401(k) match, Roth and other tax-advantaged room (IUL vs Roth).
You value a floor on part of your long-term money and accept a cap.
You can fund it for 15+ years. If not, an index fund plus term insurance is usually cleaner.

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Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Is an IUL better than investing in the S&P 500?

They do different jobs. An index fund keeps the full upside and dividends at very low cost. An IUL trades upside for a floor on crediting and adds a death benefit, with insurance charges.

Does an IUL get S&P 500 dividends?

Generally no. IUL index accounts usually track the price index, which excludes dividends. Crediting methods vary by contract.

What would an IUL have credited in 2008?

With a 0% floor, the index credit would have been 0% while the S&P 500 total return was about -37%. Policy charges still came out.

Why not just compare average returns?

Because caps, floors, missing dividends and charges change each year's result. Regulators limit the rates illustrations may assume for that reason.

Can I own both?

Yes. Many people hold index funds for growth and an IUL for the death benefit and a floored, tax-advantaged cash value.

Sources

Hans Goldstein, CA Insurance License #4273294 · NPN 20602398 · Goldstein & Co. LLC dba Goldstein Insurance Services, CA License #6016830

Contact: hans@hansgoldstein.com · 213-414-2808

General education, not tax or legal advice. Tax treatment depends on your facts and on current law, which can change. Talk to your CPA or estate attorney. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Guarantees apply only to the contractual terms of the policy. Caps, participation rates, loan rates, charges and dividends are not guaranteed and can change. Hans is paid a commission by the insurer if you buy a policy through him. For life insurance, ask and he will tell you what he earns on your specific policy. Product and company names are trademarks of their owners. Goldstein Insurance Services is an independent agency, not affiliated with or endorsed by any insurer named here. Life insurance requires underwriting; not everyone qualifies. This page describes products in general terms; read the policy and the insurer's disclosures before you buy.