Max-Funded IUL, Explained with a Car, an SUV and a Semi-Truck

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

Size the vehicle to the cargo, not the other way round

Hans explains IUL funding with vehicles. The vehicle is the death benefit. The cargo is the premium you plan to put in. A policy works when the vehicle is sized to the cargo you will actually carry, year after year.

The funding spectrum, from overloaded to empty

One precision matters. The MEC line is set by tax law, not by the insurance company. IRC §7702A applies a "7-pay test" to every policy issued since June 21, 1988: if the premiums paid in the first seven years exceed what it would take to pay the policy up in seven level payments, the contract is a MEC (IRC §7702A). A MEC's death benefit is still generally income-tax-free under IRC §101(a); what changes is that lifetime loans and withdrawals are taxed gain-first under §72(e)(10), with a 10% penalty before 59½ (IRC §72). And "loaded right" only holds if you keep funding it for years, not just in year one.

Check your own numbers with the IUL funding checker.

Option B now, Option A later

Most max-funded designs start with an increasing death benefit (Option B): the death benefit is the face amount plus the cash value. That keeps the amount the insurer has at risk level while you pay in, which lets the policy accept more premium inside the tax rules for a given face amount. When you stop paying, the policy switches to a level death benefit (Option A). From then on, cash value growth shrinks the amount at risk, which cuts the cost of insurance at the older ages where the rates climb fastest.

Where your premium goes

In this model a male 45 paying $10,000 a year loses about 15% of the first 10 years of premium to charges when the policy is max-funded, and about 22% when the same premium buys three times the death benefit. The surrender charge is extra: in year 1 the cash surrender value is about $4,245 of $10,000 (max-funded) and $0 (target-funded), which is why early cash value can feel like half the premium disappeared. A common rule of thumb is that roughly half of early premium goes to charges; in this model that is close for year-one surrender value, and too high for the ongoing charges in a well-funded design.

Hypothetical. Not an illustration of any specific policy. Not a quote. Model on current (non-guaranteed) charges: premium load 10% (years 1-10) then 5%, $10 a month fee, per-$1,000 charge for 10 years, current COI at 80% of 2017 CSO select rates, 6% illustrated crediting. Guaranteed maximum charges are higher. Ask your insurer for the policy's actual charge schedule.

The cost of insurance ladder

Read it like a ladder. The insurance part of the policy gets more expensive every year: the guaranteed maximum rate is about $8 per $1,000 at 65, $24 at 75 and $82 at 85 (2017 CSO). Each step is small until the late 70s, then the ladder curves up sharply. In a well-funded policy the cash value grows faster than the charges, so the policy carries itself with no extra premium (green). In an underfunded policy the charges eat the cash value from the inside, and the owner must pay more or the policy lapses (red, at 79 here). Real results usually land between those lines, which is why an in-force illustration every few years matters.

Hypothetical. Not an illustration of any specific policy. Not a quote. Male 45, preferred nonsmoker. Charges per the stated model; COI is charged on the net amount at risk (death benefit minus cash value), so the dollar cost depends on both the rate and how much coverage the cash value has not yet replaced. Source for rates: Society of Actuaries, 2017 CSO table 3291.

The hockey stick: why cash value takes 10 to 15 years

An IUL's cash value is flat in the early years and bends upward later. Early on, premium loads, policy fees, per-$1,000 charges and surrender charges absorb a large share of each payment. After the surrender period ends and the balance has had time to compound, the curve steepens. That shape exists only on the illustrated column. On the guaranteed column (0% crediting, maximum charges) the line is flat or falls.

Now the same $10,000 a year, at the same age, on three times the death benefit: the semi-truck with an empty tank.

In this model the max-funded design passes premiums paid around year 6 on the illustrated column, the target-funded design around year 10, and neither ever breaks even on the guaranteed column. A second, more pessimistic model put well-funded break-even around years 6 to 13 and target-funded around years 9 to 18, or never. Plan on a 10 to 20 year horizon, and read the guaranteed column with equal weight.

Is max-funded IUL the most efficient permanent coverage?

On illustrated values, a well-designed, max-funded IUL is often the most efficient way to buy permanent coverage with meaningful cash value: more potential cash value and death benefit per premium dollar at current assumptions. That is not true on guarantees. Guaranteed universal life is usually the cheapest way to guarantee a death benefit, and whole life is the only one of the three with guaranteed cash value growth. Caps, participation rates and charges in an IUL can change within contract limits, so the potential is real but not promised (GUL vs IUL, IUL vs whole life).

Small premiums: the exam question

On a small premium, the route you take through underwriting changes the math. A fully underwritten (paramed) IUL often comes with a minimum face amount, and a larger face than you need raises the cost of insurance that eats into cash value. No-exam express IULs allow smaller faces but cap the face and offer fewer health classes, so a healthy buyer may be priced at standard. Hans walks through that trade-off in paramed vs no-exam IUL.

Taxes and loans, plainly

The death benefit is generally income-tax-free to your beneficiaries under IRC §101(a). Policy loans and withdrawals up to your basis are generally not taxed if the policy is not a modified endowment contract (IRC §7702A) and stays in force; a lapse or surrender with a loan outstanding can create taxable income. Loans are not free money. Indexed and participating loans on current IULs typically charge about 5 to 5.5%, with contract maximums up to 8%, while fixed loans often net 0 to 1% after the credited rate (insurer documents, 2025 to 2026). The statutory cap on variable loan rates is tied to the Moody's corporate bond yield average, 6.25% in September 2026 (NAIC), and regulators cap the spread an illustration can assume between the loan rate and the index credit at 0.5% (AG 49-A). A 0% index year on a borrowed balance is a negative year, and a policy loan is not always the cheapest way to borrow.

Find out where your policy sits: car, SUV or semi

Send your policy or quote. Within one business day Hans tells you where it sits against the tax-law limit, what the guaranteed column shows, and whether the design fits your goal.

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Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.

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

Frequently asked questions

Sources

1. 26 U.S.C. §7702A (modified endowment contracts), Cornell LII
2. 26 U.S.C. §7702 (life insurance contract defined), Cornell LII
3. 26 U.S.C. §72 (annuities and certain proceeds), Cornell LII
4. 26 U.S.C. §101 (death benefits, accelerated benefits), Cornell LII
5. NAIC Actuarial Guideline 49-A (IUL illustrations)
6. NAIC: Moody's corporate bond yield averages (policy loan benchmark)
7. Society of Actuaries, 2017 Loaded CSO, Nonsmoker Male ANB (table 3291)