Indexed Universal Life insurance has become increasingly popular as a tool marketed for tax-advantaged growth and retirement income. When illustrated optimistically, IULs can appear to offer market like upside with limited downside and tax-free income in retirement.
However, as the Kyle Busch lawsuit illustrates, sometimes the reality of these policies doesn’t live up to the expectations.
What is an Indexed Universal Life Policy?
An Indexed Universal Life policy is a form of permanent life insurance that includes a cash value component. That cash value is credited based on the performance of a market index, such as the S&P 500, subject to caps, participation rates, and policy expenses.
Policyholders do not directly invest in the index. Growth is determined by a crediting formula set by the insurance company and relies heavily on non-guaranteed assumptions. While IULs offer flexibility and certain protections, they are complex products with many moving parts.
Expectations vs. Reality
Many IUL illustrations create the expectation of strong, reliable retirement income, even when the policy’s cash value remains below the total premiums paid for many years. To bridge that gap, projections often rely on unusually high returns during the income years, sometimes implying growth rates of 15 to 20 percent despite much lower long term crediting assumptions. These outcomes are supported by layered expenses, performance features with ongoing charges, and the assumption that crediting will remain positive every year.
In reality, expenses continue even in flat or down markets and can quietly erode the policy’s value. Most illustrated retirement income also comes from policy loans rather than actual withdrawals, depending on a favorable spread between loan interest and crediting rates. As loan balances grow, small changes in assumptions can have outsized consequences, and if the policy fails, the resulting taxable income can be significant.
A Real World Example: The Kyle Busch Case
Kyle Busch is a professional stock car racing driver and two time NASCAR Cup Series champion. His lawsuit against Pacific Life has brought these structural issues into sharper focus.
The lawsuit alleges that instead of the promised safe, self-funding retirement plan, although he paid over $10 million in premiums, with promises of tax free income and outsized growth, he ended up with a policy that generated massive expenses, relied on complex loans, and left him with net out-of-pocket losses exceeding $8.5 million.
By contrast, had he invested the same $10 million in a broadly diversified portfolio over 10 years, assuming an average 7% annual return, he could have had close to $20 million, demonstrating the cost of mixing insurance and investing in a single product.
Closing Thoughts – Keep Investing and Insurance Separate
The Kyle Busch case highlights the risks of trying to use life insurance as an investment vehicle. At Condor, we believe the most effective approach is to keep investing and insurance separate. For growth and long term financial security, we recommend a broadly diversified investment portfolio designed to meet your goals. For protection, a simple term life insurance policy is often the most efficient way to safeguard your family without the complexity or hidden costs of permanent insurance products. Keeping these strategies distinct allows you to pursue growth with clarity while maintaining the protection your loved ones need.
