How is Premium Amount Calculated in IUL?

Indexed Universal Life (IUL) insurance policies offer a unique combination of life insurance protection and the opportunity to accumulate cash value based on stock market performance (without directly investing in it). While the flexibility of an IUL is appealing, one of the most misunderstood aspects is how the premium amount is calculated.

Unlike term life insurance—where premiums are fixed and based on simple underwriting criteria—IUL premiums are flexible and complex, involving several actuarial and financial variables. Understanding how your premium is determined is key to structuring an efficient, cost-effective, and high-performing IUL policy.

This guide explains the factors influencing IUL premiums, the mechanics behind premium calculations, and how policyholders can control costs while maximizing benefits.

Summary

Premiums in Indexed Universal Life insurance are not fixed like traditional policies. Instead, they are influenced by your age, health, gender, the chosen death benefit, cost of insurance (COI), policy fees, riders, and how much cash value you intend to accumulate. There are typically three types of premium benchmarks: minimum premium (to keep the policy active), target premium (for a balanced policy), and maximum premium (up to IRS guidelines to avoid MEC status). Understanding these helps policyholders and advisors structure contributions strategically for protection and wealth-building.

What is an IUL Premium?

An IUL premium is the amount of money paid into the policy, which serves two purposes:

1. Covers life insurance costs (to keep the death benefit active)
2. Funds the cash value account (which grows over time based on index performance)

Unlike term insurance, which has a fixed premium to keep a set death benefit for a specific time, an IUL offers flexible premiums, meaning you can:

• Pay just enough to keep the policy from lapsing (minimum premium)
• Pay the target premium recommended by the carrier
• Overfund the policy for accelerated cash value growth (up to the IRS limit)

In short, the IUL premium is multifunctional, and its calculation is based on complex actuarial assumptions and goals.

Key Factors That Influence IUL Premiums

Several variables determine how much you’ll need to pay into an IUL:
Age

Older applicants face higher insurance costs due to increased mortality risk.
Gender

Females generally pay lower premiums than males due to longer life expectancy.
Health Rating

Your underwriting class (Preferred, Standard, Substandard, etc.) greatly impacts cost of insurance rates.
Death Benefit Amount

Higher death benefits require higher base premiums unless offset by overfunding or term riders.
Policy Type & Design

Whether you choose Option A (Level Death Benefit) or Option B (Increasing Death Benefit) influences internal charges and premium requirements.
Riders

Add-ons like Long-Term Care, Accelerated Death Benefit, or Overloan Protection can increase overall premium requirements.
Funding Strategy

Are you funding minimally for insurance or aggressively for cash accumulation? Your goal will determine your premium structure.
Duration of Payments

Paying for 10 years versus 30 years affects the total required premiums and policy dynamics.

The Role of Cost of Insurance (COI)

At the heart of premium calculation is the Cost of Insurance (COI), which represents the amount charged by the insurance company to provide the death benefit.

COI = Net Amount at Risk × Mortality Rate

• Net Amount at Risk:Death benefit – cash value
• Mortality Rate: Based on age, gender, health, and insurer’s tables

As your cash value increases, the net amount at risk goes down (especially under Option A), which can reduce future insurance costs. However, if cash value lags, COI can rise sharply in later years, especially in underfunded policies.

Note: COI Increases Over Time. It typically increases with age due to higher mortality risk. This makes proper funding essential to prevent policy lapse.

Calculating Minimum vs. Target vs. Maximum Premiums

When setting up an IUL, you’ll encounter three primary types of premium benchmarks:
Minimum Premium

This is the least amount required to keep the policy in force for a set number of years (usually based on guarantees). It provides:

• No real cash accumulation
• High risk of lapse
• Not ideal unless short-term coverage is the goal

Target Premium

This is the insurer’s recommended premium for a balanced policy that:

• Keeps the policy sustainable
• Accumulates moderate cash value
• Helps pay for COI and other charges

Note: This is NOT a limit. You can exceed it if overfunding for cash value.
Maximum Premium

This is the highest amount you can contribute annually without triggering MEC status under IRS rules.

It is based on:

• Age
• Death benefit
• Policy design (Option A/B)
• IRS guideline premium limits

Proper IUL design targets funding closer to this maximum for tax-advantaged cash growth.

The Impact of Death Benefit Options on Premiums

Your choice of death benefit option has a significant effect on premium calculation and structure.

Option A – Level Death Benefit:

• Keeps death benefit constant.
• As cash value grows, net risk to insurer declines.
• Lower long-term COI.
• Allows more of the premium to grow cash value (ideal after early funding years).

Option B – Increasing Death Benefit:

• Death benefit = base amount + cash value.
• Keeps net amount at risk higher longer.
• COI remains higher for longer.
• Provides more room to overfund early on.

Strategy Tip: Start with Option B to overfund early, then switch to Option A later to reduce COI and preserve gains.

Policy Charges, Fees, and Internal Costs

Aside from the COI, your premium also covers several other policy expenses. These include:

• Premium Load Fees

Charged as a percentage of each premium payment (e.g., 5%-10%).

• Administrative Fees

Monthly flat-rate fees to maintain your account.

• Rider Charges

Additional costs based on optional riders selected.

• Surrender Charges

Applies if you withdraw or cancel the policy during the early years (typically 10–15 years).

• Loan Interest

If you borrow from your policy, interest is charged—even if it’s a participating loan.

Combined, these fees can consume 10–25% of your premium in early years. This is why overfunding and efficient design are critical.

Overfunding and How It Affects Premium Design

Overfunding is the process of paying more than the target premium to increase cash value accumulation.

Benefits:

• Faster cash value growth
• Lower COI relative to cash accumulation
• Potential for tax-free income via loans

How Overfunding is Calculated:

Your advisor or insurer will calculate your non-MEC premium limit using IRS guidelines and tests like:

• 7-Pay Test
• Guideline Premium Test (GPT)
• Cash Value Accumulation Test (CVAT)

Example:

If your MEC limit is $18,500/year, and you overfund to that amount:

• Less of your premium goes to COI
• More goes into interest-earning cash value
• Your policy grows faster and lasts longer

How to Estimate Your Ideal Premium

While only insurers can give exact premium quotes, below is a basic way to estimate:

Step 1: Determine Your Goal

• Death benefit focus → base premium
• Cash value focus → max funding strategy

Step 2: Consider Your Age & Health

• Younger = lower COI = more efficient growth
• Better health = better underwriting class = lower costs

Step 3: Consult an Agent

Ask for an illustration showing:

• Level vs. increasing death benefit
• COI over time
• Guaranteed vs. non-guaranteed scenarios
• 4%, 6%, and 7% return assumptions

You can book a free strategy session with us at Seventi102 Life. We will be glad to be of assistance and help you navigate the intricacies of your policy to tailor it to your specific needs and avoid mistakes that might make the venture unprofitable.

Conclusion

Calculating premiums for an Indexed Universal Life insurance policy is far from simple. It’s influenced by a blend of actuarial science, IRS regulations, and your personal financial goals. Unlike traditional insurance, IULs offer flexibility in how you contribute—but that flexibility must be used wisely.

By understanding the factors that influence premium calculations—such as COI, policy fees, death benefit options, and overfunding strategies—you can structure your IUL to maximize its cash value potential, maintain tax advantages, and avoid common pitfalls like policy lapse or MEC status.

Always work with a knowledgeable advisor and use regular policy reviews to ensure your premium strategy continues to align with your financial objectives.

Indexed Universal Life Insurance(IUL) policies have a lot of features that can potentially provide a safety net for you and for your loved ones. You should check out this video on how to safeguard your future and that of your loved ones against unforseen circumstances like job loss or illnesses.

FAQs

Question 1: Can I change my IUL premium later?

Answer: Yes. IULs offer flexible premium payments. You can pay more, less, or even skip a payment—though skipped payments reduce cash value and can threaten policy performance.

Question 2: What happens if I only pay the minimum premium?

Answer: Paying the minimum keeps the policy active but builds little or no cash value. Over time, rising insurance costs can lead to lapse if the policy isn’t adequately funded.

Question 3: Can I pay one large premium instead of annual payments?

Answer: Yes, some people choose single premium IULs. However, these often become MECs unless specifically designed to avoid that. Spreading contributions over time is usually better for tax efficiency.

Question 4: Do all premiums go into my cash value?

Answer: No. A portion goes to COI, fees, and riders. Only the remaining balance is credited to your cash value account.

Question 5: Can I use policy loans to pay premiums later?

Answer: Yes, some IULs allow loan-to-pay premiums after a certain amount of cash value has built up. This must be carefully managed to avoid lapse or tax consequences.