Max-Funded IUL Policy and How to Get One

As you may have heard, a max funded IUL policy is a powerful way to build tax-free wealth using an indexed universal life insurance policy as the mechanism.

It’s quickly becoming a favorite tool for people looking to combine life insurance protection with the long-term cash value growth potential of a stock market index, which may be surprising to those that didn’t know life insurance could be used this way.

This strategy offers policyholders flexibility, tax advantages, and growth potential, but it’s important to understand how it works, what it costs, and how to set it up correctly as each insurance company is different.

I will break it all down and help you decide if a max-funded IUL policy is right for you as well as offer you a path way to get started.

What is a Max Funded IUL?

A Max Funded IUL, short for Max-Funded Indexed Universal Life, is a life insurance policy, specifically an IUL policy that’s funded as aggressively as possible—without triggering the IRS’s Modified Endowment Contract (MEC) rules.

In plain English 🙂 It’s a life insurance plan where you pay the most premium possible for the lowest death benefit possible that the IRS allows so it grows cash faster, without messing up the tax benefits that make life insurance strategy so powerful.

The goal is simple: minimize the death benefit (which controls cost), and maximize the portion of your premium payments going toward the policy’s cash value account. You don’t actually have to do this, it’s how your agent sets it up when you are reviewing quotes.

The cash value grows based on the index performance of a stock market index like the S&P 500. Different insurance companies have different index allocation options which is one primary reason why you should work with someone who has experience as a broker navigating different insurance companies.

So is this the same as investing in the stock market?

No, this isn’t the same as investing directly in the market, the cash value has a floor to protect you from market downturns, while still allowing for upside growth which is most often paired with a cap and participation rate set by the insurance company.

Many life insurance companies offer flexible IUL insurance products designed to be max-funded for efficient tax-advantaged growth and potential tax-free income down the road.

How Does a Max Funded IUL Work?

Premium Payments & Structure

When you open an IUL account, you’ll work with an insurance agent or financial advisor to calculate the maximum amount of money you can contribute without violating IRS rules. This limit is based on your age, the death benefit, and the policy’s structure under what’s called the the 7-pay rule.

What the heck is the 7-pay rule?

The 7-pay rule ensures that your IUL policy doesn’t become a MEC (pronounced “M-E-C”), which would change how the life insurance policy is taxed and impact the tax advantages of your withdrawals or policy loans.

In plain English: The 7-pay rule sets a limit on how much premium you can put into your indexed universal life insurance policy during the first seven years. If you go over that amount, you lose the tax-free benefits, and the IRS treats your policy more like an investment than life insurance.

Essentially, the 7-pay rule controls how much premium can be paid into your IUL policy during those early years based on the amount of life insurance coverage. Overfunding it too quickly can trigger MEC status, meaning any future distributions, including loans and withdrawals, may no longer be tax-free.

How to get a max funded IUL:

• Work with an agent to review quotes and then apply for an indexed universal life insurance policy with the lowest allowable death benefit.
• Determine your funding target based on the IRS 7-pay test and how long you want to pay. For example, you can pay until you are 65 years old and then stop paying and start taking an annual income from your policy.
• Schedule level premium payments or front-load the policy with the help of your agent.
• Monitor funding annually to stay under MEC limits.

Getting an IUL is not difficult, it’s just intimidating to a lot of people.

Our team can easily explain this to you and make sure you’re comfortable with how it works and if it’s even a solution that’s right for you. If not, that’s okay and you’ll know you made a good decision either way.

Index Crediting

The IUL’s cash value grows based on the performance of a stock market index, but you’re not exposed to market losses. Each insurance company offers different participation rates, interest rate caps, and floors (usually 0% or 1%).

This is what makes indexed universal life insurance appealing—cash value accumulation without the risk of losing principal during volatile years.

Tax-Advantaged Access

As long as your policy remains in force and is not a MEC, you can access the cash value via tax-free loans or withdrawals. These funds can be used to supplement retirement income, cover expenses, or support estate planning strategies.

Pros of a Max Funded IUL

• Cash Value Growth with Downside Protection
• Tax-Deferred and Tax-Free Income Potential
• Flexible Premiums and Death Benefit Options
• Liquidity in Retirement or Emergencies
• Alternative to Overfunded IRAs or Retirement Accounts

Cons of a Max Funded IUL

• Requires a Commitment to Higher Premiums
• Complex Rules (like MEC and 7-pay)
• Policy Lapse Risk if Mismanaged
• Fees Vary by Insurance Company and Product
• Not Ideal for Short-Term Needs or Infrequent Funding

How Much Money Do You Need to Open a Max Funded IUL?

It depends on your age, health, and the death benefit you qualify for. But typically, those who max fund an IUL contribute at between $100 and $2,000 per month, with the average being around $450.

Calculating how much to spend per month on an IUL

A good way to think about this is just like your 401K, what percentage of your annual income would you like to save?

For example, if you’re earning $90,000 per year and want to save an additional 3% ($2700 per year or $225 per month) of your income because you’re already maxing out your 401k match, then you would ask your agent rhe following:

“Can you run me some quotes for a max funded IUL for $225 per month?”

If you’re older, the minimum to structure the policy properly may be higher due to the cost of insurance, but that’s why you need to review as max funded IUL isn’t always the best fit for everyone, and that’s okay.

A health exam is usually required, as insurance companies use underwriting to determine your eligibility and premium cost.

Long story short, the healthier you are, the lower your costs, and the more efficient your IUL account becomes.

Is a Max Funded IUL Worth It?

It depends on your financial goals, budget, age and health.

If you’re looking for a permanent life insurance product that offers tax-free income, protection against market volatility, and flexible distributions, then yes, it’s one of the most versatile insurance products available.

Compared to whole life insurance, a max-funded IUL may offer more premium flexibility.

Who Offers the Best IUL?

There are a lot of strong companies that offer IULs.

Some of the top insurance companies offering max-funded IUL policies currently include:

• National Life Group
• Securian
• Nationwide
• Pacific Life
• Lincoln Financial
• Allianz
• North American

The best IUL for you depends on your age, health, contribution level, and goals.

A knowledgeable insurance agent can compare companies for you based on current interest rates, participation rates, and policyholder benefits and navigate the insurance company that best fits your exact scenario.

Can I Move My 401(k) to an IUL Account?

Not directly and frankly, that’s not something someone should be trying to convince you to do. The only reason I’m mentioning this is unfortunately it’s a question we hear pretty often.

A 401(k) is a qualified retirement plan governed by different IRS rules.

Scenario you don’t want to follow.

Take distributions (and pay your penalties) or roll funds into an IRA, pay the taxes, and then fund a life insurance policy such as a max-funded indexed universal life plan. I’m not sure of any scenario where that is in your best interest, but apparently rogue agents are out marketing this to boost their sales.

401K is a completely different mechanism for accumulating wealth that allows you to capture employer matched dollars (free money), why would you want to lose out on that? Max your 401K to max your employer match, and then consider what percentage of your income you can afford to potentially leverage an IUL.

Final Thoughts: Should You Consider an IUL Policy?

If you’re seeking long-term tax-advantaged growth, life insurance coverage, and flexibility in accessing funds during retirement, a Max Funded IUL might be a smart fit.

It’s not for everyone. But if you’ve maxed out retirement accounts, want tax-free income, or want to use life insurance as a strategic part of your financial planning, this could be one of the most powerful tools available.