He was told the policy would ‘pay for itself’ by 70. At 68 the insurer asked for $9,000 or it would lapse.

*7 min read · Last updated July 3, 2026*

In this article

– What an IUL illustration is really showing you – The engine that drains the policy: cost of insurance – Why the guaranteed column is the one that matters – The tax sting on a lapse – How to stress-test a policy you already own – FAQ

Raj Malhotra bought an indexed universal life policy at 52 with a $500,000 death benefit. The agent’s illustration showed the cash value growing enough that Raj could stop paying premiums around age 70, and the policy would carry itself for life. He paid faithfully for 16 years. Then, at 68, a letter arrived. The policy was heading toward lapse. To keep the $500,000 in force, the insurer needed roughly $9,000 more that year, and more every year after. The projection that sold him the policy had quietly failed.

What an IUL illustration is really showing you

Indexed universal life is a permanent policy with a cash value that earns interest tied to a market index, such as the S&P 500. Your money is not in the market. The insurer credits interest based on the index’s movement, subject to a cap on the upside and a floor, often zero percent, on the downside.

The illustration you were shown at the sale had two sets of columns. One set assumed a rate the agent chose, often 6 or 7 percent, and it produced the attractive picture: cash value climbing, premiums that eventually stop, coverage that lasts. The other set, the guaranteed column, used the policy’s minimum crediting rate and its maximum charges. That column usually shows the policy running out of money decades early.

Regulators tightened the rules on these projections through an actuarial guideline known as AG 49, precisely because illustrated rates were being pushed too high. Even so, the assumed column is a projection. The guaranteed column is the contract. For a broader look at how policy types differ on this, see our guide to the types of life insurance policies.

The engine that drains the policy: cost of insurance

Inside every universal life policy is a charge called the cost of insurance, or COI. It is what the insurer deducts each month to actually provide the death benefit. Here is the part that surprises owners: the COI is not level. It rises every single year as you age, because the odds of paying the claim rise as you get older.

In the early years, when you are younger and the COI is cheap, the cash value grows. In the later years, the COI climbs steeply. If the index crediting keeps pace with the rosy illustration, the growing cash value absorbs those rising charges. If crediting comes in lower, as it often does over a full market cycle with caps in place, the cash value cannot keep up.

Once the cash value starts shrinking, the policy enters a spiral. Lower cash value earns less interest, while the rising COI takes bigger bites. That is the mechanism behind Raj’s letter. The policy was not defective. It performed below the illustrated rate, and the math did the rest.

Why the guaranteed column is the one that matters

When you evaluate any indexed universal life policy, illustration in hand, put your finger on the guaranteed column and read it first. Ask the agent one direct question. If the policy credits only the guaranteed minimum and the charges hit their maximum, at what age does this policy lapse?

If the honest answer is “in your 70s,” you are not buying lifelong coverage. You are buying a projection that only holds if the market cooperates for 30 years. That is a very different product than the one most buyers think they are getting.

This is the same reason we caution readers about treating permanent life insurance as an investment. The gap between the story and the guarantee is where people lose money. We spell that out in the whole life insurance investment myth and in what to look for in a life insurance policy.

The tax sting on a lapse

A lapse does not just end your coverage. It can hand you a tax bill. If your policy lapses while it holds a loan or has gains, the IRS can treat the released gain as taxable income. The taxable amount is generally the policy’s value above your cost basis, which is what you paid in premiums.

So a policyholder can pay premiums for two decades, watch the policy collapse, lose the death benefit, and still owe income tax on phantom gains in the year it lapses. If you overfunded the policy, you also need to understand the modified endowment contract rules, which we cover in the modified endowment contract tax trap.

How to stress-test a policy you already own

If you own an indexed universal life policy, request an in-force illustration from your insurer. This is a fresh projection based on your actual cash value today, not the sales illustration from years ago. Ask for it at both the current assumed rate and the guaranteed rate.

Read where each version says the policy lapses. If the guaranteed version lapses in your 70s or early 80s and you want coverage for life, you have three choices. Pay more premium now to shore it up, reduce the death benefit to a level the cash value can sustain, or replace the coverage. Do the review while you still have options. Raj got his letter at 68, when raising the premium was the only move left, and it was the most expensive one.

FAQ

What does an indexed universal life illustration actually promise? The assumed-rate columns promise nothing. They are projections based on a chosen crediting rate. Only the guaranteed column reflects what the insurer is contractually required to do, using the minimum crediting rate and maximum charges.

Why would a policy I have paid into for years suddenly lapse? The internal cost of insurance rises every year with your age. If the index crediting comes in below the illustration, the cash value cannot cover those rising charges, so it shrinks and eventually runs out unless you add premium.

Can I be taxed if my life insurance lapses? Yes. If the policy lapses with gains or an outstanding loan, the IRS can treat the gain above your premiums paid as taxable income. You can lose the coverage and owe tax in the same year.

How do I find out if my IUL is in trouble? Request an in-force illustration from your insurer at both the current and guaranteed rates. It shows a fresh projection from your current cash value and tells you the age at which the policy is projected to lapse under each assumption.

Should I just cancel an underperforming IUL? Not without a review. Surrendering can trigger taxes and surrender charges, and you may lose coverage you still need. Compare adding premium, lowering the death benefit, or replacing the policy before you decide, ideally with a licensed advisor.

Raj kept his policy alive by paying the $9,000, and more the next year, but the promise that it would carry itself was gone. The coverage was never fraudulent. It was sold on a projection he was never told to question, and by the time the guarantee mattered, it was the only number left.