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IUL vs Roth IRA: the ceiling is the story.

Both are funded with after-tax dollars, but only the Roth IRA’s tax-free withdrawals are set directly by statute, without policy conditions. An indexed universal life (IUL) policy’s tax treatment depends on how it is designed and kept in force. The real differences are cost, limits and risk.

Published by CentraLife · Updated

The short answer

It depends on what you need. If you are eligible and your goal is after-tax retirement savings, qualified withdrawals from a Roth IRA are tax-free under §408A. An IUL is life insurance, not a retirement account. It may be worth evaluating alongside retirement savings only if you also need permanent coverage, can fund it for years, and accept its charges and lapse risk.

Compare the same contribution: hypothetical IUL or Roth IRA

Choose what you would contribute each month and for how long. Both options get the same out-of-pocket dollars: the IUL side grows at the crediting rate you assume, the other at the market return you pick.

Your inputs

After tax if cashed out, end of year 25 (age 65)

Hypothetical IUL

$1,171,570

Before policy fees and charges

10.84% a year, scenario assumption (editable), not guaranteed

Roth IRA + brokerage

$884,550

8% a year, scenario assumption (editable), net of fund fees

Each option: $300,000 out of pocket.

Hypothetical and not guaranteed. This is not a quote or a policy illustration: it does not price age, health or underwriting, and it does not model policy loans, death benefits or retirement income. Both figures are after tax if cashed out. Unless you add policy costs under Advanced assumptions, the IUL figure is before fees and charges, which reduce real policy values. Taxes use the rates you choose.

Year 25: hypothetical IUL after tax $1,171,570 (Before policy fees and charges); Roth IRA + brokerage after tax $884,550.

Advanced assumptionsAge, tax rates, IRA eligibility and policy costs
Policy costs (your assumptions, optional)

Your own assumptions, not any insurer’s charges. All at zero means results are before policy fees and charges.

The numbers behind the result

End of year 25 (age 65): $300,000 out of pocket for each option
OptionValueIf cashed outAfter tax if cashed out
Hypothetical IULBefore policy fees and charges$1,417,397$1,417,397$1,171,570
Roth IRA + brokerage$914,839$914,839$884,550
IUL contributions
$300,000
Growth at the assumed rate
$1,117,397
Hypothetical IUL after tax at nearby crediting rates
9.84%10.84%11.84%
$1,011,878$1,171,570$1,360,446
Assumptions and limits
  • Educational comparison of how the same contributions could accumulate under the assumptions you select. It is not a quote, a policy illustration or personalized insurance pricing, and it does not model death benefits, policy loans, retirement income or required minimum distributions.
  • IUL side: contributions grow at the assumed crediting rate, applied as an annual effective rate and compounded monthly (each month grows by (1 + rate)^(1/12)); the comparison account uses the same convention. A real IUL credits each index segment once a year. Actual indexed crediting depends on index results, caps, participation rates and floors, changes from year to year, can be 0% in some years and is not guaranteed.
  • Both default rates are scenario assumptions you can change, applied as annual effective rates. Neither is a forecast or an expected policy or fund return. Where the defaults come from: 10.84% is the highest 10-year figure displayed in an independent product-research platform’s IUL backtest list, viewed October 16, 2026 (current crediting terms applied to past index movements, before policy charges). The platform does not publish its method, including whether the figure is a compound or an average annual return, so 10.84% is not a verified historical compound return. The default market return of 8% a year is an assumption, not a measured return. The 13.7% option is the S&P 500’s 10-year annualized price return, excluding dividends, from the same platform’s index screen on October 16, 2026 (Chartrow reports 13.78% for October 17, 2016 to October 15, 2026); past returns do not predict future returns.
  • Unless you enter an assumed-cost adjustment, IUL results are before policy fees and charges. Real policies deduct charges such as cost of insurance, premium charges, administrative fees and surrender charges, which reduce values. The comparison account’s return is after fund fees.
  • Assumed-cost adjustment: a charge on each contribution, a fixed monthly fee (it continues after contributions stop) and an annual charge on the value. These are your assumptions, not any insurer’s charges. If the costs use up the value, the policy side shows that year, and later contributions are shown separately without growth.
  • Age changes only the comparison account’s tax rules and how far the comparison runs. Real insurance costs and the coverage available depend on age, health and underwriting, which this calculator does not price.
  • IUL after tax: the value, with any gain above contributions taxed as ordinary income at your later tax rate. No modified endowment contract (MEC) test is performed; a policy taxed as a MEC would be treated differently.
  • Comparison account: it receives the same out-of-pocket contributions on the same monthly schedule, growing at the selected market return after fund fees. That rate is an assumption, not a forecast.
  • A traditional 401(k) deferral costs (1 − your current tax rate) of its amount; Roth deferrals and Roth IRA contributions cost their full amount. 2026 IRS limits are assumed to stay the same in later years; actual limits change. Catch-ups apply once your age makes them certain. Catch-ups are modelled as Roth when you choose Roth deferrals or answer yes to the prior-year-wages question (over $150,000 from this employer); otherwise they are pre-tax. The model assumes your plan offers a Roth option. Employer match is included only if you choose it, and only on pay up to $360,000.
  • Account after tax: pre-tax money is taxed, plus 10% before age 59½; Roth earnings are taxed (plus 10% before age 59½) until the 5-year rule, counted from the first contribution in this comparison, and age 59½ are both met; brokerage gains are taxed at the capital-gains rate, or at your later tax rate on deposits held a year or less. State taxes, Social Security taxation and Medicare premiums are not modelled. The comparison stops before required minimum distributions could begin.

IUL vs Roth IRA, side by side

Indexed universal life (IUL) compared with a Roth IRA, feature by feature, with numbered sources
FeatureIndexed universal life (IUL)Roth IRA
What it isPermanent life insurance with a death benefit and cash value. Interest is credited by a formula linked to an index; the cash value is not invested in the index.[8][15]An individual retirement account. You choose the investments.[5]
Money going inAfter-tax premiums. The amount is limited by underwriting, affordability and the policy’s tax-law limits.[8][9]After-tax contributions. 2026 limit: $7,500, or $8,600 at age 50+, shared across all your traditional and Roth IRAs and capped at your taxable compensation.[1][2]
Income limitsNo IRS income limit. Insurers apply medical and financial underwriting, which can limit how much coverage, and therefore premium, they accept.2026 contribution phase-out by modified AGI: $153,000–$168,000 (single, head of household), $242,000–$252,000 (married filing jointly), $0–$10,000 (married filing separately and lived with your spouse during the year; if you lived apart all year, the single range applies). Above the limit, converting traditional IRA money is taxed pro rata on Form 8606 across all your traditional, SEP and SIMPLE IRAs. A workplace plan’s designated Roth account, where offered, has no income limit; Roth and pre-tax deferrals to 401(k) and 403(b) plans share one annual limit, and a 457(b) plan has its own.[1][3][18][16][17]
Market downsideIndex credits usually have a floor (often 0%), but cost of insurance and other charges are still deducted, so cash value can fall in a zero-credit year.[15][13]The account rises and falls with the investments you choose, including market losses.
UpsideCredits are limited by caps, participation rates or spreads. These are non-guaranteed and can change within the contract’s limits.[14][15]Not capped. Results depend on investment returns minus fund and account fees.
CostsCost-of-insurance and other policy charges are deducted from cash value. Cost of insurance depends partly on age, so it generally rises as the insured gets older; surrender charges and low early cash values make the first years expensive to leave.[13][14]Fund expense ratios and any account fees.
Taxes while investedGrowth inside a contract that qualifies as life insurance is not taxed while it stays in the policy.[8][10]Not taxed while in the account.[5]
Taxes on money outIf the policy is not a modified endowment contract (MEC): withdrawals are generally taxed only above your investment in the contract (withdrawals that reduce benefits in the first 15 years can be taxed sooner), and loans are generally not taxed while the policy stays in force. If it is a MEC: loans and withdrawals are taxed gain-first.[10][8][9]Regular contributions come out first, tax- and penalty-free; converted amounts come next and can face the 10% tax if taken within 5 years of the conversion. Earnings are tax-free in a qualified distribution: after the 5-year period and at 59½, disability, death, or a first home (up to $10,000).[4][5]
Access before 59½No age-based penalty on non-MEC loans or basis withdrawals. A taxable MEC distribution before 59½ generally adds a 10% tax. Surrender charges can apply at any age.[10]Contributions any time. Earnings in a non-qualified distribution are taxable and may face the 10% additional tax unless an exception applies.[4][6]
Required minimum distributionsRequired-minimum-distribution rules apply to the retirement plans and IRAs the IRS lists, such as 401(k), 403(b) and 457(b) plans and traditional IRAs. A life insurance policy you own outside a retirement plan is not on that list.[7][19]None while the original owner is alive. Beneficiaries must follow distribution rules after the owner’s death.[4][7]
If things go wrongIf cash value cannot cover charges and loan interest, the policy can lapse. A lapse or surrender with a loan outstanding can be treated like a surrender for cash: the unpaid loan can count toward what you received, which can create taxable income even though no cash is paid out.[13][12]Market losses reduce the balance.
At deathDeath benefit is generally income-tax-free to beneficiaries (exceptions apply, such as a policy transferred for value). Unpaid loans reduce it.[12][11][13]The account passes to your beneficiaries, who must follow the inherited-IRA distribution rules.[4]

Figures are for 2026 unless stated.

Who an IUL may fit, and who it usually does not

An IUL may be worth evaluating if:

  • You already contribute what you are eligible to put in a Roth IRA, or your income is above the Roth limits.
  • You need permanent life insurance in addition to long-term savings.
  • You can pay the planned premium for many years, because early cash values are low and surrender charges apply.
  • You keep emergency savings outside the policy.
  • You will review annual statements, in-force illustrations and any loan balance.

It usually does not fit if:

  • Your savings fit within the Roth IRA you are eligible to fund.
  • You do not need life insurance, or only need it for a set number of years.
  • You may need the money within the next several years or might stop paying premiums.
  • The case rests on a high illustrated rate or a promise that you “can’t lose.”
  • You plan to borrow heavily from the policy without monitoring it.

If one of these describes you, an IUL consultation is probably not the right next step. Being above the Roth income limits does not, by itself, make an IUL the best alternative.

Which to fund first: questions to settle

  1. Are you eligible to contribute to a Roth IRA this year, and how much room do you have?
  2. Do you need life insurance at all, and for how long?
  3. Have you used other tax-advantaged room you are eligible for, such as a workplace plan?
  4. Will you need any of this money before age 59½ or within the next several years?
  5. Can you commit to the premium for many years and still keep an emergency reserve?
  6. Have you compared a carrier illustration’s guaranteed and non-guaranteed columns, including a lower-crediting scenario?

These are general questions, not a recommendation for your situation. The order that fits you depends on your income, taxes, health, coverage needs and how long you can keep funding each option.

How an IUL strategy can go wrong

Charges continue when the index credits nothing.

The floor limits the index credit, not the cash value. Cost of insurance and other charges are deducted every month, so a flat or negative index year can still reduce the cash value.[13]

Non-guaranteed terms can move against you.

Caps, participation rates and many charges are not guaranteed. If they become less favorable, the same premium buys less growth, and you may need to pay more to keep the planned result or keep the policy in force.[14]

Underfunding or stopping premiums can end the policy.

Paying less than the design assumes leaves charges to be taken from cash value. If the cash value reaches zero, the policy can lapse.[13]

Loans can turn into a tax bill.

Loan interest accrues while charges continue. If the loan balance and charges use up the cash value, the policy can lapse. A lapse or surrender with a loan outstanding can be treated like a surrender for cash, so the unpaid loan can create taxable income without any cash to pay the tax.[12][10]

Funding too fast can make it a MEC.

Premiums above the 7-pay limit turn the policy into a modified endowment contract. Loans and withdrawals are then taxed gain-first, and taxable amounts taken before 59½ generally carry an extra 10% tax.[9][10]

Leaving early is expensive.

Cash values are often low in the early years and surrender charges may apply, so quitting in the first years can return less than you paid in.[13][14]

An illustration is not a promise.

Carrier illustrations of current IUL policies generally must follow NAIC Actuarial Guideline 49-A, which limits the crediting rate and loan leverage an illustration can show, but the illustrated values remain non-guaranteed.[15]

What can change the answer

  • Your income relative to the Roth phase-out range.
  • How much you want to save each year compared with the IRA limit.
  • Your age, health and underwriting class, which drive the cost of insurance.
  • Policy design: death benefit relative to premium, and funding pace relative to the MEC limit.
  • Actual caps, participation rates and charges over time, compared with the illustration.
  • How long you fund and keep the policy.
  • How the alternative for extra dollars is taxed, for example capital gains in a brokerage account.
  • Changes in tax law.

Questions to ask before buying an IUL

  • At what age does the policy lapse on the guaranteed column, with the premium I plan to pay?
  • What are the cost of insurance, premium load, administrative and rider charges each year?
  • What are the surrender charges, and for how many years do they apply?
  • What crediting rate does the illustration use, and what happens if credits come in lower?
  • What are the current cap and participation rate, and what minimums does the contract guarantee?
  • How close is my planned premium to the 7-pay (MEC) limit, and who monitors it?
  • What loan type and loan interest rate are assumed, and at what loan level will I be warned?
  • What happens if I reduce, skip or stop premiums?
  • Will I receive an annual statement and an in-force illustration, and who reviews them with me?

IUL vs Roth IRA: common questions

Should I fund a Roth IRA before an IUL?

It depends on what you need the money to do. If your goal is retirement savings and you are eligible to contribute, qualified withdrawals from a Roth IRA are tax-free under §408A. An IUL is life insurance: the cost of insurance and other policy charges are deducted from its cash value, and its tax treatment depends on the policy staying in force and not becoming a MEC. An IUL may be worth considering alongside retirement accounts when you also need permanent life insurance and can fund the policy for many years. Compare the actual costs of the specific account and policy rather than assuming either is cheaper.

What if my income is too high for a Roth IRA?

Direct Roth IRA contributions phase out above IRS income limits that change each year (for 2026, $153,000–$168,000 for single filers and $242,000–$252,000 for married couples filing jointly). With taxable compensation you can still contribute to a traditional IRA, which has no income limit for contributing, although the deduction may be limited, and a traditional IRA can be converted to a Roth IRA; the combination is sometimes called a “backdoor” Roth. Under current federal tax law, the taxable part of a conversion is figured on Form 8606 using your nondeductible basis and the value of all your traditional, SEP and SIMPLE IRAs, not only the new contribution. Ask a tax professional before using this route.

Can I make Roth contributions at work if my income is too high for a Roth IRA?

Possibly. If your employer’s 401(k), 403(b) or governmental 457(b) plan offers designated Roth contributions, the IRS sets no income limit on them. Not every plan offers the option, so check your plan. Roth and pre-tax deferrals to 401(k) and 403(b) plans share one annual limit across all the plans you participate in — $24,500 for 2026, plus any catch-up contribution you qualify for — while a 457(b) plan has its own separate limit. Whether to use a workplace Roth, an IRA, an IUL or a combination depends on your plan, your budget and whether you need permanent life insurance.

Are IUL policy loans the same as Roth withdrawals?

No. Qualified Roth withdrawals are tax-free under §408A. IUL access relies on conditions: withdrawals up to your investment in the contract and loans that are generally not taxed while a non-MEC policy stays in force. Loans accrue interest and reduce the death benefit, and a lapse with a loan outstanding can create taxable income.

When does the Roth IRA five-year clock start?

There are two clocks. For tax-free earnings, the 5-year period begins with the first tax year for which a contribution was made to a Roth IRA set up for you — a contribution made by the deadline for the prior year counts for that year — and you also need to be 59½ or meet another qualifying condition. Each conversion has its own 5-year period, starting on the first day of the tax year of the conversion; taking converted money out before it ends can trigger the 10% additional tax on the part that was taxable at conversion, unless an exception applies. Withdrawals come out in order: regular contributions, then conversions (oldest first), then earnings.

Which grows faster, a Roth IRA or an IUL?

It depends on the investments, the policy design and actual crediting. A Roth IRA has no insurance charges and no cap on returns. An IUL’s credits are limited by caps or participation rates and reduced by policy charges, but it includes a death benefit and has no annual contribution limit like an IRA’s, although §7702 and §7702A limit premiums relative to the death benefit. Neither is guaranteed to outperform the other.

Can I have both a Roth IRA and an IUL?

Yes. They are separate: Roth IRA eligibility depends on your income and compensation, and an IUL depends on underwriting and affordability. Owning both is common when someone wants retirement savings and permanent life insurance.

Can you lose money in an IUL even with a 0% floor?

Yes. The floor applies to the index credit, not to your cash value. Cost of insurance and other charges are deducted regardless of the credit, so the cash value can decline in a year with a zero credit, and more quickly if charges rise or premiums stop. Early surrender charges can also return less than you paid in.

Sources

  1. 1.IRS: 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (IR-2025-111, Nov. 13, 2025)
  2. 2.IRS: Retirement topics: IRA contribution limits
  3. 3.IRS: Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
  4. 4.IRS: Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
  5. 5.U.S. Code (Cornell LII): 26 U.S.C. §408A: Roth IRAs
  6. 6.IRS: Retirement topics: Exceptions to tax on early distributions
  7. 7.IRS: Retirement plan and IRA required minimum distributions FAQs
  8. 8.U.S. Code (Cornell LII): 26 U.S.C. §7702: Life insurance contract defined
  9. 9.U.S. Code (Cornell LII): 26 U.S.C. §7702A: Modified endowment contract defined (the 7-pay test)
  10. 10.U.S. Code (Cornell LII): 26 U.S.C. §72: Annuities; certain proceeds of endowment and life insurance contracts (incl. §72(e) and §72(v))
  11. 11.U.S. Code (Cornell LII): 26 U.S.C. §101: Certain death benefits
  12. 12.IRS: Publication 525, Taxable and Nontaxable Income (life insurance proceeds; surrender of policy for cash)
  13. 13.Texas Department of Insurance: Life insurance guide (universal life, cash value and lapse)
  14. 14.National Association of Insurance Commissioners: Life Insurance Buyer’s Guide
  15. 15.National Association of Insurance Commissioners: Actuarial Guideline XLIX-A: illustrations of policies with index-based interest (revised; adopted Dec. 11, 2025)
  16. 16.IRS: Retirement plans FAQs on designated Roth accounts
  17. 17.IRS: How much salary can you defer if you’re eligible for more than one retirement plan?
  18. 18.IRS: Instructions for Form 8606, Nondeductible IRAs
  19. 19.IRS: Retirement topics: Required minimum distributions (RMDs) (accessed Oct. 20, 2026)

Sources accessed . Limits and thresholds change each year; check the IRS pages for current figures.

Related guides

Start with what you need the money to do.
Then compare the account and the policy on their own terms.

A licensed CentraLife advisor can review how your savings are split across taxable, tax-deferred and after-tax accounts, including where a Roth IRA and any life insurance need fit. No cost, no obligation.

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Educational information only, not individualized tax, legal or investment advice. CentraLife is an independent insurance agency and does not provide tax preparation or legal services. Indexed universal life insurance is a life insurance contract, not a retirement account or a direct market investment; the policy contract and the insurer’s rules control. Caps, participation rates and many charges are not guaranteed and can change within contract limits, and illustrated values are not guaranteed. Tax treatment depends on the policy staying in force and not becoming a modified endowment contract, and on current law, which can change. Contribution limits, income thresholds and distribution rules are set by the IRS and change over time; confirm current figures at irs.gov and with your tax professional. Calculator results are hypothetical and are not a quote or a carrier illustration. CentraLife LLC · NPN 21105331.