Why Cash Value Matters in IUL: The Rising Cost of Insurance Problem

Written by: Joshua Wahls, founder of Insurance By Heroes.

Reviewed by: Joshua Wahls, licensed insurance producer, NPN 19191959.

Last reviewed: May 27, 2026

Our process: We review life insurance content for accuracy, state availability, carrier fit, underwriting context, and consumer clarity. See our Editorial Policy, Licensing, and Advertising Disclosure.

Cash value in indexed universal life insurance is often misunderstood. It is easy to view cash value as an optional accumulation feature, or as something that only matters when a policy is being designed for supplemental retirement income. In reality, cash value also helps support the insurance mechanics inside the policy.

This becomes especially important when premiums are paid for a limited number of years, when a policy is started later in life, or when the goal is for coverage to last for decades. The reason is the internal cost of insurance.

An IUL has an annual-renewable-term style insurance engine inside it. The policy may be permanent, but the pure insurance charge is not priced like a fixed level premium forever. The cost of insurance rate generally becomes more expensive as the insured gets older. If planned premiums are reduced or stopped, that rising internal insurance cost still has to be paid by something. That something is cash value.

The Real Reason: The Insurance Cost Rises With Age

Universal life separates the policy into moving parts: the insurance protection, expenses, and the cash value account. The Wisconsin Office of the Commissioner of Insurance says the main expense of a universal life policy is the cost of insurance charge, and that the rate of that charge increases as the insured ages. The NAIC also explains that universal life combines term insurance with a cash account and stays active as long as the cash value is enough to cover insurance costs.

That is the piece people miss. A premium schedule may show payments stopping after a certain number of years, but the internal insurance charge does not automatically stop when planned premiums stop. The policy keeps deducting monthly charges. Those charges are tied to the cost of insurance, the amount of insurance still at risk, policy fees, and any rider costs.

IUL mechanic	What it means in plain English
Annual-renewable-term style insurance cost	The pure insurance part is repriced as the insured gets older, instead of staying level forever.
Cost of insurance charge	The monthly charge that helps pay for the death benefit protection.
Net amount at risk	The gap between the death benefit and the policy value the carrier is actually backing.
Cash value	The reserve that can reduce the amount at risk and help pay future charges.
Limited-pay design	A premium schedule, not a guarantee that all future internal costs disappear when planned payments stop.

Why Timing and Age Matter

A policy started earlier may have decades for cash value to build before late-age cost pressure becomes severe. That does not make poor funding okay, but it gives the design more runway.

A policy started later in life, or funded over a shorter premium window, has less time to build cash value before the expensive insurance years arrive. The coverage may still need to last to age 90, 100, or beyond, even if planned premium payments stop much earlier.

So the question is not simply, “How much cash value do we want?” The better question is, “How much cash value does this policy need so it is not carrying too much expensive insurance later?”

Cash Value Reduces the Problem

In a level death benefit design, often called Option A, cash value can reduce the net amount at risk. That is why a cash-rich design is not just about accumulation. It can lower the amount of pure insurance the carrier is carrying inside the policy.

For example, if the death benefit is $500,000 and the policy has only $75,000 of cash value at an older age, the carrier may still be supporting a very large amount of insurance risk. If the policy has $220,000 of cash value instead, the net amount at risk is much lower. The rate may still be higher because the insured is older, but it is being applied to a smaller insurance gap.

This is the real reason cash-rich IUL design can matter. The cash value is not just a side account. It is the counterweight to the rising internal insurance cost.

The Limited-Pay Trap

A limited-pay illustration can be misleading if “pay for a set number of years” is heard as “the policy is fully handled forever.” Sometimes that is true under a specific illustration and stress test. Sometimes it is not.

After planned premiums stop, the policy may still need to cover:

• Cost of insurance charges
• Monthly policy expenses
• Rider charges
• Any loan interest, if loans are taken
• Any shortfall from lower-than-expected index crediting
• Any effect from future cap, spread, or participation-rate changes

If the cash value is thin when payments stop, the policy can enter the expensive part of the curve with too little reserve. That is when additional premiums may be needed later, or the policy may fail before the intended lifetime target.

Hypothetical Example: Cash Value Gets Eaten Down

The easiest way to see the renewable-term chassis is to look at what can happen later in life if the policy is underfunded. The numbers below are hypothetical and are not from any carrier illustration, but they show the basic mechanics.

In this example, planned premiums have already stopped. The policy has some cash value at age 80, but the internal insurance cost and policy charges rise as the insured gets older. If index credits are weak and no additional premium is paid, the cash value can be drawn down year after year until there is not enough value left to keep the policy in force.

Age	Hypothetical annual COI + policy charges	Hypothetical cash value after charges and weak credits
80	$7,000	$120,000
82	$8,500	$116,000
84	$11,000	$109,000
86	$14,500	$98,000
88	$19,500	$82,000
90	$26,500	$59,000
92	$36,000	$29,000
94	$48,000	$6,000
96	$62,000	$0 / lapse risk

The exact numbers will vary by carrier, underwriting class, death benefit, rider costs, policy charges, and actual credited interest. The point is the direction. If the cost curve is rising and the cash value curve is falling, the policy can run out of room.

Why Some Designs Have More Flexibility Than Others

Some IUL designs have more flexibility than others. A policy started earlier, funded for a longer period, or designed with a lower net amount at risk may not need the same early cash-value emphasis as a policy with a compressed funding window.

When the funding window is shorter or the insured is older, the math is compressed. The policy has less time to build value, and the expensive years arrive sooner. That is when the design often has to shift from “minimum premium for the death benefit” to “maximum durability after planned payments stop.”

What We Should Look For in an Illustration

An IUL illustration should not be judged by the first-year premium or the projected cash value alone. It should be judged by whether the policy can survive the age-based insurance cost curve after planned premiums stop.

What to check	Why it matters
Cost of insurance schedule	Shows how the internal insurance charge changes as the insured gets older.
Net amount at risk	Shows how much pure insurance the policy is still carrying.
Cash value when planned premiums stop	This is the reserve available when the policy begins relying more heavily on internal value.
Cash value at ages 80, 90, and 100	Shows whether the policy can survive the expensive years.
5.50% or lower stress test	Tests whether the policy survives without relying on optimistic current assumptions.
Guaranteed and midpoint columns	Shows how fragile the design may be if non-guaranteed assumptions change.
No-lapse period	A no-lapse period may help for a while, but if it ends before lifetime, cash value still matters.

A Simple Way to Explain It

Cash value is not always about trying to maximize accumulation. In many IUL designs, cash value has a defensive job: it helps the policy absorb future insurance costs.

Inside the IUL, the life insurance charge behaves like annual renewable term. As the insured gets older, the cost of each dollar of insurance generally gets higher. If premiums are reduced or stopped, the policy still has to pay those charges. If the policy does not build enough cash value early enough, it can become stressed right when the internal insurance cost is getting more expensive.

That is why a cash-rich design can be appropriate even when accumulation is not the main objective. In those cases, cash value is part of the durability strategy.

Bottom Line

The key issue is the rising internal cost of insurance. The annual-renewable-term structure means the policy generally becomes more expensive to carry as the insured ages. A limited-pay design does not remove that cost; it only changes the planned premium schedule.

That is why cash-rich design matters. More early cash value can reduce the net amount at risk, support future monthly deductions, and give the policy a better chance of lasting after premiums stop.

In this context, cash value is not merely an accumulation feature. It is part of the durability strategy.

Sources

• Wisconsin Office of the Commissioner of Insurance: Consumer Alert Related to Universal Life Insurance
• NAIC Life Insurance Topic Page
• NAIC Life Insurance Buyer’s Guide
• California Department of Insurance Life Insurance Guide
• SEC-filed universal life prospectus example describing cost of insurance and net amount at risk mechanics

This article is educational. Indexed universal life policies contain non-guaranteed elements, including caps, participation rates, spreads, cost of insurance rates, policy charges, and rider availability. Always review the current carrier illustration and actual policy contract before making a recommendation.