Have Your Cake and Eat It Too

How much do you know about using insurance as a wealth-building strategy?

This common idiom — have your cake and eat it too — trips some folks up. It simply means wanting two good things at the same time when having both isn’t actually possible. You can’t have it both ways. You must choose between two desirable but mutually exclusive options, like keeping a cake (having it) and eating it (consuming it), which obviously can’t happen simultaneously. This idiom is often used to point out unrealistic expectations, like wanting great schools without paying higher taxes.

This idea connects to life insurance because most people think of it as a policy where you pay premiums to an insurance company so your family can receive a specified amount of money when you die — and that once that money is paid into the policy, it can’t also be used by you. That assumption isn’t entirely accurate with certain types of permanent life insurance that build cash value the policy owner can access while living.

It’s not new. Wealthy families have been using this approach for decades.

Today, we’re talking about Indexed Universal Life insurance, or IUL. Not because it’s the perfect solution for everyone — it isn’t — but because understanding your options is how you build real financial power. And this is one option that deserves to be part of the conversation.

Have You Heard of E.F. Hutton?

In the late 1970s and early 1980s, E.F. Hutton was one of the most influential financial firms in the country. Its reputation was so strong that the phrase “When E.F. Hutton talks, people listen” became part of popular culture. That credibility mattered, because what the firm was talking about was a major shift in how life insurance could be used.

E.F. Hutton helped design and popularize Universal Life insurance, which at the time was a new type of permanent life insurance that looked very different from the traditional whole life policies people were used to. What made Universal Life so attractive was how it functioned.

The policy — or insurance contract — still provided a death benefit, but it also allowed significant cash value to accumulate inside the policy. That cash value could grow without being taxed each year, and policyholders could access it through loans while they were alive, using the insurance contract itself as collateral. The borrowed funds could be used for any purpose.

For many people, this was the first time life insurance clearly demonstrated that it could provide protection, liquidity, and growth within a single structure.

The idea became extremely popular. It worked. It was profitable. And it was fully legal under the tax code at the time.

People were using Universal Life to accumulate money in a tax-favored way, and advisors were increasingly recommending it as an alternative to taxable investment accounts. Policies were often funded aggressively, with an emphasis on cash value growth and access rather than just the death benefit.

That attention didn’t go unnoticed.

The IRS began challenging these high-premium life insurance arrangements, arguing that many were being structured and used more like investment vehicles than traditional insurance. Those challenges led to court cases over how the tax rules applied to aggressively funded life insurance, and taxpayers relying on the existing statute and regulations often prevailed. E.F. Hutton’s strategies were part of this broader controversy.

After the government lost key tax cases involving aggressively funded life insurance, Congress stepped in and changed the law — not to eliminate the strategy, but to define its boundaries.

Rather than abolish Universal Life, Congress created clearer rules around how these policies could be funded and how much cash value could accumulate relative to the death benefit. The goal was to preserve life insurance as a legitimate financial tool while preventing it from becoming an unlimited tax shelter. Those rules didn’t undo the concept — they formalized it. They are the foundation for how modern cash-value life insurance works today.

Indexed Universal Life came later and is built on the same legal and structural framework as earlier Universal Life policies. Instead of earning interest based only on rates set by the insurance company, IUL allows cash value growth to be linked to market indexes, such as the S&P 500. This created a way to benefit from positive market performance while still operating within the same regulated life insurance structure.

The Benefits of Today’s IULs

Modern Indexed Universal Life policies are built on the same legal and structural framework as the Universal Life policies of decades past. They remain permanent life insurance contracts designed to provide a death benefit, accumulate cash value, and allow access to that cash value through policy loans.

What has changed is how those policies are designed and the range of features insurers now offer within that framework.

While the specific features vary from one insurer to another, the underlying idea remains consistent. Indexed Universal Life is designed to combine permanent life insurance protection, access to living benefits for critical, chronic, or terminal illness, the ability to borrow against cash value while alive, and the opportunity to benefit from positive index performance without being directly invested in the market — all within a regulated insurance contract.

Here are a few examples of how those features might show up in real life:

• You pass away (death benefit) — The policy pays a tax-free benefit to your children or other beneficiaries, helping replace income, cover expenses, or provide financial stability.

• You’re diagnosed with a qualifying critical, chronic, or terminal illness (living benefits) — You may be able to access a portion of the death benefit while you’re alive to help pay for care, lost income, or related expenses.

• Your hot water heater fails or you face an unexpected home repair (policy loan) — You borrow against the policy’s cash value instead of using a credit card or liquidating other assets. When structured properly and kept in force, the loan is generally not treated as taxable income.

• You want your money to grow without being directly invested in the stock market (index-linked growth) — Positive index performance can result in credited interest, which may be subject to caps, spreads, and participation rates. In years when the stock market is down, the policy typically credits between 0% and 1%, so you do not lose value due to market declines, though policy charges and costs can still reduce cash value.

• You receive a bonus or have uneven income from month to month (flexible premium funding) — You may be able to contribute more to the policy in stronger years or reduce or offset premium payments in tighter months, depending on policy design.

Are IULs Safe?

When a financial tool claims to offer protection, access, and growth, it’s reasonable to ask whether it’s safe. Indexed Universal Life policies are, at their core, life insurance. And with life insurance, safety isn’t a side feature — it’s the foundation.

Life insurance companies are among the most heavily regulated financial institutions in the United States. They are required to maintain significant reserves, meet strict capital requirements, and undergo ongoing oversight by state insurance regulators. Their business model depends on long-term stability, because policies are designed to remain in force for decades — often for an entire lifetime.

History supports that stability.

During the Great Depression, thousands of banks failed. By contrast, relatively few life insurance companies became insolvent, and state regulators and guaranty mechanisms generally worked to protect policyholders, although no system is completely risk-free. That pattern has continued through recessions, market crashes, and financial crises. Banks fail far more frequently than life insurance companies.

This stability is one reason banks and corporations use life insurance through Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI), subject to internal risk, capital, and regulatory guidelines. These policies are held on balance sheets to help manage long-term obligations, offset benefit costs, and provide predictable, tax-advantaged growth over time.

What Does This Mean for Me?

Indexed Universal Life, like any financial vehicle, can be helpful for some people depending on what you’re trying to accomplish.

When assessing whether an IUL makes sense for you, it’s important to make sure the basics are in place before committing to a premium. If you have access to an employer-sponsored retirement plan with a match, capturing that match should usually come first. That match is free money. Building an emergency fund also matters, because cash value in a life insurance policy takes time to accumulate and shouldn’t be your only source of liquidity early on.

While index-linked growth can be attractive for some without assuming direct market risk, wealthy individuals often use life insurance alongside traditional investments, not instead of them. They value the stability, the tax treatment, and the ability to access funds without having to sell other assets at the wrong time.

For some people, IUL may be a useful addition to a broader financial plan. For others, it may simply be something to understand for the future. Either way, knowing how it works — and when it does or doesn’t make sense — puts you in a stronger position to make informed decisions.

Information Is Power

Life insurance is often treated as a checkbox instead of a subject worth understanding. But insurance is a core part of financial literacy — especially when it comes to protecting yourself, your income, and your future options.

Knowing what tools exist doesn’t mean you need to use them. It means you’re aware of your options — and awareness creates leverage.

Life insurance is a legal agreement. Read it. Ask questions. Understand how it works, what could cause it to fail, and the tradeoffs involved before you sign. If something isn’t clear, that’s a signal to slow down — not to proceed.

Be informed — and be careful out there, lovely.

Related Money Dearest Pillars

→ Cash Flow

→ Saving & Investing

Sources

• Internal Revenue Code §§ 7702 and 7702A

• U.S. Treasury and IRS rulings and court cases involving the taxation of life insurance and cash-value accumulation

• Insurance Information Institute (III) — insurer solvency and regulation history

• FDIC historical data on bank failures

• Industry history and regulatory analysis of Universal Life and Indexed Universal Life insurance

• General information on Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI)

Disclosure: This article is for educational purposes only and does not constitute personal financial, tax, investment, or insurance advice. Insurance products and strategies discussed may not be appropriate for every individual. Policy features, costs, benefits, and outcomes vary by insurer and contract design.

Always review policy documents carefully and consult with qualified financial, tax, and legal professionals regarding your specific situation before making any decisions. No advisory or client relationship is created by this content.