Indexed Insurance Policies Hedge against Inflation

High Interest Rates Increase Market-Linked Growth of Indexed Universal Life Insurance (IUL) and Fixed Index Annuities (FIAs)

When individuals reach the age of 65, they can expect to live about 25 years in retirement, and even longer if married.

Indexed universal life insurance, IUL, and fixed index annuities, FIAs, are important assets for comprehensive retirement planning. However, they are often overlooked or rejected for the wrong reasons. Both IUL and FIAs offer growth linked to the market with principal protection, eliminating the risk associated with market fluctuations.

The combination of high bond interest rates and current high inflation allows the cash value in IUL and FIA policy accounts to grow significantly. This enhanced growth potential, along with the protection of the principal, helps build retirement funds while safeguarding against market risk. This provides peace of mind to policy owners concerned about inflation, recession, and stock market crashes.

Indexed universal life insurance, IUL, offers numerous benefits, including:

• Immediate access to a death benefit in case of untimely death

• Available living benefit options for chronic, serious, or terminal illness

• Tax-free growth linked to selected market indices (not invested in those indices)

• Risk-free growth through a 0% “floor” that protects against negative market returns

• Potential protection against inflation

• Tax-free lifetime income through policy loans repaid with death-benefit proceeds

• Tax-free income that shields against rising tax rates

• Tax-free income that minimizes Social Security taxation and Medicare premiums

• Tax-free death benefit

• Asset protection during the insured’s lifetime (varies by state)

• Elimination of all taxes forever and asset protection when held in a dynasty trust

Fixed index annuities (FIAs) generally offer the following benefits:

• Positive gains, tax-deferred, linked to one or more stock indices, with no stock dividends

• 100% principal protection through a 0% floor, ensuring that money never decreases due to market downturns

• Guaranteed returns through one or more bonuses credited to the accumulation value, typically ranging from 5% to 10%, depending on the policy

• Useful for growing and protecting “qualified money” in IRA, 401(k), and 403(b) plans

Interest Rates and Options Budgets

The growth of cash value in IUL and FIA accounts is tied to market indices through options, but the cash value itself is not directly invested in the markets. This market-linked growth with no risk is achieved through options. Here’s how it works: at the beginning of a crediting period (e.g., one year), most of the policy’s cash value is allocated to fixed income vehicles such as corporate bonds that offer a fixed interest rate. This ensures a predictable return and preserves the starting cash value with a 0% floor. The remaining cash value is used to purchase market index options. If a market index rises during the crediting period, the options are exercised, leading to cash value growth. If an index falls, the options expire, but the starting cash value remains protected. When corporate bond interest rates are high, less cash needs to be invested in bonds to guarantee the 0% floor, leaving more cash available for index options. This increases the potential for cash value growth, as reflected in higher caps and participation rates when the options are exercised. Conversely, when interest rates decline, corporate bond yields also decrease, resulting in smaller options budgets and reduced potential cash value growth. However, insurance companies can lock in higher bond yields for longer periods by purchasing longer-term bonds when yields are high. This maintains high options budgets and sustained cash value growth. Similarly, during low-interest rate periods, insurance companies purchase shorter-term bonds that can be replaced quickly when rates rise. Therefore, while there may be a lag as insurance companies gradually replace lower yield bonds with higher yield ones, the options budgets and resulting cash value growth inevitably increase with bond interest rates.

Inflation and Bond Interest Rates

Exposure to inflation affects the cash value in IUL and FIAs, as well as the real value of policy loans and death benefits. To combat inflation, the U.S. Federal Reserve Bank raised interest rates from near zero to over 4% between 2022-23, causing corporate yields to climb to around 5%. Further rate increases are expected in 2023. The current high interest rate environment has enabled insurance companies to increase options budgets for IUL, resulting in potential cash value growth. It’s important to note that interest rates do not always align with inflation. In fact, the Fed may lower interest rates if the economy enters a deep recession, although recessions often coincide with deflation.


IUL and FIA policies are valuable but underutilized alternative asset classes that protect principal from market downturns and offer significant tax-free growth in positive market years. A high interest rate environment enhances potential cash value growth in IUL and FIAs, helping counteract the impact of inflation.

If you want to learn more about annuities and insurance products for building and safeguarding wealth, click here to contact Shoreview LLC or call 303-442-3100.