Funding IULs in Volatile Markets: Smart Strategies for Stability and Growth

Market volatility is at an all-time high, with inflation concerns, fluctuating interest rates, and an unpredictable stock market. For financial professionals and policyholders considering Indexed Universal Life (IUL) policies, the key question is: how can one secure long-term growth while minimizing risk?

Unlike traditional investments, IUL policies offer a compelling advantage—protection from market downturns through their built-in 0% floor. But how you fund them matters just as much as the product itself. The right funding strategy can mean the difference between maximizing tax-free growth and leaving potential gains on the table.

The TCJA Sunset and the Urgency of Estate Planning

Time is running out on the historically high estate tax exemption. The Tax Cuts and Jobs Act (TCJA), passed in 2017, significantly increased the federal estate tax exemption, allowing individuals to shield up to $13.61 million (or $27.22 million for married couples) from estate taxes in 2025. However, this provision is set to expire at the end of 2025, reverting the exemption back to pre-TCJA levels—likely around $6 million per individual.

For high-net-worth individuals, this means a significant increase in potential estate tax exposure. Without proper planning, families could see a much larger portion of their wealth subject to taxation, reducing the amount passed on to heirs.

Life insurance, particularly IUL, offers a strategic way to address this challenge. By repositioning taxable assets into a properly structured life insurance policy, individuals can create a tax-free death benefit that replaces lost wealth and ensures liquidity for estate settlement. Unlike other assets that may be subject to estate taxes and potential forced liquidation, an IUL policy provides immediate access to funds when heirs need them most.

Advisors should be proactively engaging with clients now—before the exemption drops—to implement strategies that lock in today’s tax advantages. Waiting until the sunset date could limit available options and expose clients to unnecessary estate tax burdens.

To navigate these complexities, understanding how broader economic conditions affect financial decision-making is crucial. That’s why examining current market conditions is essential before finalizing any funding strategy.

Why Market Conditions Make This a Relevant Conversation

The financial markets are on edge. The stock market has seen sharp swings, with indices bouncing between gains and losses as investors react to trade policy shifts and economic data. Just recently, the Dow Jones surged by nearly 500 points following the Trump administration’s decision to impose tariffs on Canada and delay certain tariffs on Mexican imports, plus the retaliatory tariffs from China and India. But before that, the Nasdaq had suffered a 7.5% drop since mid-February, rattled by fears of prolonged economic strain.

Trade policies are also creating ripple effects across industries. While the postponement of tariffs on auto imports temporarily lifted investor sentiment, the broader impact of ongoing trade disputes continues to weigh on market confidence. Industries tied to global supply chains—autos, manufacturing, and even financial services—are seeing increased volatility, making long-term financial planning more complex.

Beyond trade policy effects, broader economic indicators reflect a complex financial landscape. The CBOE Volatility Index (VIX) remains above historical averages, signaling continued market uncertainty. The services sector is showing resilience, but private sector hiring has slowed. Inflation, though easing in some areas, remains a concern for consumers and businesses alike. The Federal Reserve’s stance on interest rates is under constant scrutiny, as policymakers balance inflation control with economic growth.

Adding to the uncertainty, new data from the Atlanta Fed’s GDPNow tracker suggests that the U.S. economy is on track for negative GDP growth in the first quarter of 2025. This raises concerns about a potential recession, which could further impact market performance, consumer confidence, and investment strategies. If economic contraction occurs, policyholders may become even more cautious about where and how they allocate their funds, making structured funding strategies for IULs all the more critical. This raises concerns about a potential recession, which could further impact market performance, consumer confidence, and investment strategies. If the economy contracts, policyholders may become even more cautious about where and how they allocate their funds, making structured funding strategies for IULs all the more critical.

Economic volatility isn’t just a headline—it directly impacts financial planning. The cost of goods and services is still climbing, and consumers are feeling the squeeze. If someone is considering an IUL, they may be hesitant to commit a large lump sum in a market that could take a sharp downturn tomorrow. That hesitation is valid. A poorly timed lump-sum investment can mean years of sluggish growth, especially if index performance stalls after a big contribution.

For policyholders and financial professionals, these market conditions make one thing clear: now is not the time for poorly timed, emotionally driven financial decisions. A structured approach to funding Indexed Universal Life (IUL) policies—one that leverages smart timing strategies and minimizes market exposure risk—has never been more critical.

Then there’s interest rate fluctuation. While higher rates are great for fixed-income products, they can create uncertainty for long-term insurance planning. People who were comfortable with a certain premium structure might now be questioning their cash flow.

With all this turbulence, one thing is clear: how you fund an IUL in today’s market needs careful consideration.

The Right Way to Fund an IUL in an Uncertain Market

Every policyholder has different financial realities, but most funding strategies fall into three main approaches: monthly premium payments, premium deposit accounts (PDAs), and annuity-funded premiums. While each of these strategies ultimately functions as a form of dollar cost averaging (DCA), they differ in how they approach risk management, tax efficiency, and cash flow flexibility.

Monthly premium payments are the simplest and most common approach. Rather than making a large upfront contribution, policyholders make scheduled monthly payments just as they would with traditional insurance but this is worth highlighting because there are quarterly and annual funding options. Monthly maximizes the investment tranches, drastically reducing the chances of having a 0% return year (I've seen it as low at 60% less likely). This method is ideal for those who can’t or don’t want to fund their entire policy upfront. It also provides a natural form of risk mitigation, as premiums are spread over time, reducing the risk of investing a large sum just before a market downturn.

For those with the ability to make a lump sum investment but who want to avoid timing risk, Premium Deposit Accounts (PDAs) offer an attractive alternative. However, not all IUL providers offer PDAs, so policyholders should confirm availability with their carrier before considering this strategy. A PDA allows a policyholder to deposit a lump sum, which then gets allocated into the IUL over time in predetermined installments. This approach ensures premiums are paid on time, eliminates the stress of active management, and earns some interest along the way. The trade-off? Any interest earned in the PDA is taxable, meaning policyholders need to be mindful of the tax impact.

Then there’s annuity-funded premiums, a strategy that works particularly well for retirees or those holding underutilized annuity assets. Instead of taking taxable withdrawals from an annuity, policyholders can structure a payout that funds their IUL premiums, effectively repositioning taxable assets into a tax-advantaged life insurance policy. The long-term benefit? A tax-free death benefit for heirs instead of a heavily taxed annuity distribution. This strategy is often overlooked, but for the right client, it can significantly improve legacy planning outcomes.

Whole Life and GIUL: Alternative Options for Stability

While Indexed Universal Life (IUL) offers market-linked growth with downside protection, some policyholders may prefer options where the death benefit is not tied to market performance. Whole Life insurance and Guaranteed Indexed Universal Life (GIUL) provide more predictable structures but come with trade-offs.

Whole Life policies offer guaranteed cash value accumulation, fixed premiums, and a guaranteed death benefit, making them attractive for those who want certainty. However, this stability comes at a cost—Whole Life is generally more expensive than IUL and offers less growth potential due to lower crediting rates and limited flexibility. Additionally, Whole Life policies do not offer the same tax-advantaged loan provisions or flexibility in premium payments that IULs do.

GIUL, on the other hand, can deliver many of the benefits of Whole Life at a lower cost. It provides guaranteed premiums, guaranteed cash value growth, and a guaranteed death benefit, but without the high costs typically associated with Whole Life. However, while GIUL offers more stability, it lacks the growth potential of IUL, which may be a drawback for clients looking for tax-advantaged accumulation.

For a deeper dive into how these products compare, refer to the comparative analysis in the Primer Page, where I break down the differences in cost, guarantees, and growth potential.

Tax Efficiency and Estate Planning Advantages

IULs are already tax-efficient vehicles, offering tax-free growth, tax-free loans, and a tax-free death benefit. But how they’re funded can impact their overall tax efficiency. Monthly premium payments have no immediate tax impact, but PDAs generate taxable interest, and annuities can trigger taxable distributions. The key is understanding how to structure funding to maximize after-tax benefits.

Beyond taxes, estate planning comes into play. For high-net-worth individuals looking to minimize estate tax exposure, funding an IUL properly can create a significant advantage. Moving funds into an IUL removes taxable assets from the estate while securing a leveraged, tax-free payout for beneficiaries. The funding method chosen should align with broader wealth transfer goals, ensuring that liquidity and tax efficiency are optimized.

Adapting to Market Conditions: What Financial Professionals Need to Do Now

The worst mistake an advisor can make right now is assuming that what worked five years ago still applies today. The economic landscape has changed, and so have client concerns. Funding strategies should be reassessed based on cash flow stability, tax positioning, and long-term policy goals.

Clients who are hesitant to make large contributions should be shown the advantages of spreading out their funding. Those with surplus liquidity should be guided toward structured solutions like PDAs or annuity funding to optimize tax outcomes. And for those concerned about estate taxes, life insurance should be framed as an asset repositioning tool, not just a death benefit product.

Ultimately, IULs are built for times like these. Financial professionals should take action now by reviewing clients' funding strategies, reassessing tax implications, and aligning policies with long-term financial goals. Encourage clients to consider structured funding options to maximize benefits while minimizing risks. The right funding approach today can lead to lasting financial security for the future. They provide protection, flexibility, and long-term growth potential even when markets are chaotic. But their full potential is only realized when funding is done strategically. Advisors who understand and communicate these strategies effectively will help their clients weather today’s uncertainty while securing a stronger financial future.

Final Thoughts

The market won’t calm down overnight. Inflation, interest rates, and tax policy will continue to shift. But that doesn’t mean financial professionals and policyholders should sit on the sidelines. Indexed Universal Life remains one of the most powerful financial tools available, but only when it’s funded correctly. Whether through monthly payments, PDAs, or annuity-funded premiums, choosing the right strategy today can make all the difference in the years to come.

The question isn’t whether to fund an IUL—it’s how to do it wisely given the economic climate. For those who get it right, the rewards will be well worth the effort.

For those looking for more in-depth research on funding strategies, estate planning, and life insurance structuring, check out my paid research papers, reports, and executive summaries on the members-only page, Coffee and the Paper. All materials available there are designed for white labeling, allowing financial professionals to leverage high-quality insights for their clients. And as always I'm always available for questions.

This content is for educational purposes only and is intended for financial professionals. It should not be considered specific financial, tax, or legal advice. Advisors should consult with appropriate professionals before implementing any strategies discussed.