When the S&P 500 Freezes and Falls: IUL Can Be a Safer Retirement Option

Introduction: What Happens When the Market Stalls and Fall?

‍When the S&P 500 flatlines — or worse, declines — for years, it can be devastating for retirees or those nearing retirement. While many investors assume the stock market always recovers in the long run, history proves that extended periods of stagnation or decline are not only possible but have happened before.For those relying on portfolio withdrawals, this introduces a serious threat: sequence of returns risk — the risk of running out of money due to poor early returns.‍

In this article, you’ll learn:

• Why long-term equity downturns are more common than most assume
• How sequence of returns risk can devastate retirement income
• How IUL works to lock in gains and avoid market losses
• Why market volatility and sideways markets can benefit IUL policies
• Why IUL is a strategic asset for diversifying your investment portfolio

High-net-worth individuals and financial advisers increasingly use Indexed Universal Life Insurance (IUL) as a safer, more stable retirement option. It offers protection against market losses, tax-advantaged growth, and locked-in gains.

This article explores why IUL can be a powerful financial planning tool during market “ice ages” and "freefalls"— when the S&P 500 fails to deliver the returns you were counting on.

The Reality: Markets Can Deliver Decades of Poor Returns

Long-term stock market losses are not theoretical — they’ve happened before, and they can happen again. Investors often assume that equities always recover in the long run, but history tells a different story.

Historical Periods of Negative or Stagnant Market Returns

There have been multiple 10 and 20-year periods when equity markets delivered negative or stagnant real returns, leaving investment portfolios deeply underperforming—or worse, permanently impaired. A landmark study found that U.S. stocks experienced five separate 10-year periods of negative returns, including the decades ending in:

• February 2009
• September 1974
• August 1939
• June 1921

Beyond the U.S., similar long-term losses occurred globally:

• Italian equities fell 78% over the 20 years to 1979
• Japanese stocks dropped over 64% across two decades ending in 2009
• UK investors saw nearly half a century of underperformance due to wars, recessions, and inflation

These are not outliers — they are part of the investing landscape. And if they happen again, they could have a devastating impact on retirement and capital preservation strategies.

The Hidden Threat: Negative Compounding and Sequence Risk

What Is Sequence of Returns Risk?

When markets decline early in retirement, losses compound in ways that are hard to recover from. This is known as sequence of returns risk.

Two Retirees, Two Outcomes: The Power of Market Timing

Paul retired in 1990 with $1 million, withdrawing $50,000 each year. He enjoyed a strong bull market and ended 1999 with $2.71 million. His withdrawal rate averaged 4.18%. A fantastic retirement and growth outcome.

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Bill, however, retired in 2000 with the same strategy but faced the tech crash, 9/11, and the 2008 financial crisis. By 2009, his portfolio was just $286,952. His withdrawal rate surged to 9.21%. A terrible retirement and a very uncertain future.

‍Why Early Losses Matter

This contrast illustrates a critical point: it’s not just the average returns that matter — it’s the order of returns.

Diversify Your Portfolio with IUL

Despite what some claim, the S&P 500 does not average 10% a year reliably. Markets are volatile, unpredictable, and non-linear.

Why Consider an Indexed Universal Life Insurance (IUL) Policy?

An IUL can provide a strategic advantage, particularly for high-net-worth individuals:

• 0% floor: Never loses value due to stock market declines
• Annual reset: Locks in gains each year
• Downside buffer: Performs well in sideways or negative markets
  

It complements traditional discretionary fund management services and offers built-in resilience.

Stress-Testing Retirement with Monte Carlo Simulations

Modelling Real Market Risks

Capital for Life Advisers use Monte Carlo simulations to model thousands of future stock market outcomes, including:

• Long flat periods
• Deep downturns
• High volatility
  

These models reveal a crucial insight: the sequence of returns matters as much as the average return. Even well-diversified portfolios can run dry if poor returns strike early in retirement.

How Capital for Life Helps

At Capital for Life, we specialise in building resilient retirement strategies using IUL.

Our Services Include:

• Custom Monte Carlo simulations
• Detailed cash flow scenario modelling
• Strategic retirement income planning
• Advice tailored for high-net-worth individuals
  

We help clients:

• Reduce the risk of depleting retirement funds
• Improve the chances of meeting long-term income needs
• Preserve more wealth in uncertain market environments

Conclusion: A Smarter Way to Hedge Against Stock Market Ice Ages and Free Falls

History teaches us that equity markets can and do experience long stretches of poor performance. This risk is not hypothetical — it’s real and potentially ruinous for retirees.

Indexed Universal Life Insurance offers:

• Protection against market downturns
• Locked-in gains
• Tax-deferred growth
• A stable source of retirement income

💡 Coming Soon: Capital for Life Adviser Membership

Our new subscription service for Capital for Life Advisers coming soon will offer exclusive resources, enhanced support, and valuable tools to help you grow your IUL business.

📞 Are you a high-net-worth individual exploring your options? Book a call to discover how Indexed Universal Life can protect and grow your wealth — even in uncertain markets.

Frequently Asked Questions About IUL in Volatile Markets

What happens if the stock market goes sideways for 10 years?

If the market experiences a decade of sideways movement — with gains and losses that average out to zero — traditional investment portfolios may see little to no growth after inflation and fees. Worse, retirees making withdrawals during this time face sequence of returns risk, which can erode capital even without large market losses.

However, an Indexed Universal Life (IUL) insurance policy can perform well in such an environment. Thanks to annual resets and a zero floor, IUL locks in gains during up years and avoids losses in down years, allowing for cumulative growth even when the market finishes flat.

Is Indexed Universal Life Insurance good in volatile markets?

Yes. Volatility can benefit an IUL policy. While traditional portfolios may suffer from volatility, IUL captures positive performance during up years and avoids negative returns during down years due to its 0% floor.

Over time, these locked-in gains compound, especially in choppy or range-bound markets like those seen in the S&P 500 between 2000 and 2010.

Can IUL protect me during a bear market?

IUL is uniquely positioned to protect against bear market losses. When the linked index declines, such as the S&P 500, the policy’s credited interest is never below 0%. This means you can’t lose money due to market downturns.

While equity investors must wait for markets to recover, IUL policyholders preserve previous gains and avoid drawdowns.

How does IUL compare to holding ETFs or mutual funds during market stagnation?

While ETFs and mutual funds may provide growth over time, they offer no protection against market declines, and fees can eat into returns during sideways markets. IUL, on the other hand:

• Credits interest based on index performance up to a cap
• Has a zero floor that eliminates downside market risk
• Locks in gains annually, avoiding the rollercoaster effect of reinvested volatility
  

As a result, IUL may outperform ETFs in non-trending or volatile environments while also offering tax-deferred growth and death benefit protection.

Is Indexed Universal Life Insurance better than annuities for market protection?

Both IULs and fixed-indexed annuities offer market-linked growth with downside protection, but they serve different purposes.

• Annuities often lock up capital and are designed to produce lifetime income.
• IULs offer greater flexibility, tax-free access to cash value, and a death benefit, making them more suitable for wealth accumulation, estate planning, or tax-free retirement income.
  

IUL can be a superior choice for those looking to grow and access capital in a protected structure during times of market uncertainty.

What is the ‘zero floor’ in an IUL policy?

The zero floor is a built-in guarantee that prevents your cash value from losing money due to market performance. If the S&P 500 or another index posts a negative return, your IUL policy is simply credited 0% — no gain, but critically, no market losses either.

This is particularly powerful during bear markets or flat markets, where losses can drag traditional portfolios downward.

What does ‘annual reset’ mean in an IUL?

The annual reset means that your gains are locked in at the end of each policy year and become your new principal. If the market falls the following year, your cash value does not decline.

This allows for a stair-step growth effect over time, which is especially beneficial during years of volatility or repeated market swings.

Is IUL suitable for retirement income planning?

Yes. High-net-worth individuals frequently use IUL for tax-advantaged retirement income. The policy allows for:

• Tax-deferred growth
• Tax-free withdrawals and policy loans (when properly structured)
• Protection against market-based sequence of returns risk
  

This makes IUL a strategic tool for retirement income in both rising and flat market environments.

Can IUL help mitigate sequence of returns risk?

Sequence of returns risk occurs when market losses early in retirement permanently impair your portfolio. Because IUL doesn’t lose value during down years and locks in gains, it buffers against poor early returns and preserves long-term wealth — especially when used alongside traditional investments.

What types of investors should consider IUL in stagnant or volatile markets?

Indexed Universal Life Insurance is particularly suitable for:

• Pre-retirees and retirees seeking downside protection
• High-net-worth individuals with estate planning or wealth transfer goals
• Investors concerned about future bear markets, inflation, or tax increases
• Clients who want market participation without direct exposure to losses
  

Anyone who values stability, tax efficiency, and capital preservation during uncertain market cycles should consider IUL.

‍Disclaimer

This article is authored by Carlton Crabbe, Chief Executive Officer of Capital for Life, a specialist indexed universal life insurance broker. The information provided in this article is for educational and informational purposes only and should not be construed as financial or investment advice. While the author possesses expertise in the subject matter, readers are advised to consult a qualified financial advisor before making investment decisions or purchasing life insurance products.