Indexed Universal Life vs Whole Life

Permanent life insurance is often overlooked when it comes to financial planning. Typical financial planning says, “buy term and invest the difference.” Few people actually understand the long-term benefits that a permanent whole life insurance policy can give them. The major advantages include tax-free death benefits and annual dividends. However, not all permanent life insurance policies produce the same financial results. 

Indexed Universal Life (IUL) insurance policies are often sold by insurance agents without proper instruction and client understanding. At Life Benefits, we do not recommend IUL policies because of their high risk and low guaranteed benefits. In this article, we are going to break down the difference between Indexed Universal Life (IUL) vs Whole Life Insurance Policies.

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 which is part of any IUL contract).

Three things to understand about Participating Whole Life policies: 

  1. Participating Whole Life Insurance is based on guarantees backed up by the insurance company, not market speculation or indexes. 
  2. As an owner of a Participating Whole Life Policy, with a Mutual Life Insurance Company, you get to share in the profits of the company. Dividends.
  3. Participating Whole Life Insurance is based on your whole life, not just a term like an IUL policy.

Here’s an example of what could happen if you fund an Indexed Universal Life vs a Whole Life Policy with $3,010 per year for 40 years:

Indexed Universal Life Policy

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.

Participating Whole Life Policy 

Compare this to purchasing a Participating Whole Life Policy for the same premium. At age 66 your cash value is: $222,260 instead of zero like with an 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 downturn.

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.

It helps to consider the risks and benefits when choosing between whole life vs. universal life policies. At Life Benefits, we recommend a whole life insurance policy over an IUL policy because of whole life insurance’s long-term coverage and cash value benefits. Whole life insurance is the best way to keep more of the money you make, grow your wealth safely and have financial peace of mind.

To get a whole life insurance policy crafted for you, schedule an appointment with us.