To understand Universal Life Insurance policies (IULs), you first have to understand the difference between term and whole life (or universal life) policies.

Term life insurance is life insurance for a certain definite term, expressed in the number of years in the life of the policy. For example, twenty-year term insurance provides insurance against the death of the insured for twenty years, as long as the premiums are continually paid. Term insurance is relatively inexpensive until the term ends (for most people), and then if the insured wants to renew, the premiums go up substantially (because the insured is now several years older than when the policy was created). There is no cash value of term insurance.

Whole life insurance, on the other hand, is permanent. They provide not just a death-benefit, but also a cash value. And because you're not just purchasing a temporary death benefit without cash value, the premiums for whole life are going to be significantly higher than with term life insurance. But the premium amount is also flexible. However, a good portion of those premiums is being invested, and the cash value of your policy grows, and much of it can be withdrawn if the need arises, without penalty. There is also no limit to the amount you can contribute annually.

IULs are a specific type of whole life insurance policy where the cash value of the policy grows based upon index performance. Between you and your financial advisor, each year, the money in your policy is put in an index for growth—typically ones that reflect market indexes like the S&P 500, Dow Jones Industrial Average, Nasdaq 100, etc. (though the policy money is not invested directly into the stock market).

Except that with UILs, you can hedge your bets with the stock market because the insurer will guarantee your policy will not lose value, even if the stock market does (in exchange for caps in growth). So If you choose the S&P 500 as your index, and it has a cap of 4%, you will always get growth of between 0% and 4%, no matter how the stock market performs.

IULs also offer tax-deferred tax accumulation for retirement. IULs are often a good fit for business key-person insurance, premium financing plans, or a vehicle for estate planning.