Indexed Universal Life vs Whole Life

Three things to understand about IUL policies:

  1. The return assumed in an IUL policy is not the return that your cash value increases by. There are fees to cope with in an IUL policy that can conceivably eat up more than your annual gains in a weak market.
  2. The cap on your IUL returns can knock out forty percent or more of the earnings you could have experienced if you had simply invested directly in the Index of your choice.
  3. When the market actually does go through a corrective period of time (which typically happens every eight-ten years), an IUL insurance policy also forfeits the growth that a dividend paying whole life insurance policy would continue to provide.

This means that about the time you need to draw from your life insurance policy to offset the income distributions that you can’t take from your investment without destroying your principle, your life insurance policy is no longer adding the value (this is due to the ever-increasing cost of the term insurance platform IUL is built upon).

Here’s an example of what could happen if you fund a life insurance policy at $3,010 per year for 40 years:

At age 66 you need to pull $40,000 annually from your policy because of a market correction that has just occurred and you don’t want to down draw the principle you’ve saved outside of your policy.

If your policy is an IUL and growth took place as illustrated using the maximum allowable rate over the past 40 years, then you have NO GUARANTEES that there will be any money to use from your policy! Even though you have paid in $117,000.

The non-guaranteed returns illustrated means you might have $126,00 of accumulated cash value to draw from at age 66. But, at $40,000 a year, you will run out of money in the policy in just a little over 3 years.  After that, your policy will lapse and you will have no insurance coverage on your life.

Compare this to purchasing a Participating Whole Life Policy for the same premium. At age 66 you are guaranteed to have: $222,260 instead of zero like in the IUL policy.  With dividends earned, your accessible cash values could be more than double of what is projected in the IUL and of course the dividends paid on the Participating Whole Life Policy can be used to offset the interest on the $40,000 policy loans you take to live on during a market down turn.

In addition, the Participating Whole Life Policy won’t lapse like the IUL policy  because there are no premiums required after age 66.  This means that the guaranteed cash values keep accumulating along with any dividend payments.

Things to remember:

  • Owning an IUL policy means that you are assuming the risk.
  • Owning a Participating Whole Life Policy, that risk is assumed by the insurance company.
  • Not all permanent policies sold today  guarantee that you will have coverage until the day you die.  ONLY Participating Whole Life Policies guarantee that: If you pay your premiums and any interest due on  policy loans you have outstanding against your life insurance, then your coverage will last you your entire lifetime.