Whole Life VS Index Universal Life
Both of them are a type of Permanent Life Insurance, but the way they work are so different.
When it comes to Permanent Life Insurance, there are two popular options to consider: Whole Life Insurance and Index Universal Life Insurance (IUL). Although both fall under the category of permanent insurance, they differ significantly in their functionality and benefits. With both of them, you are guaranteed a death benefit as long as you satisfy the minimum requirements imposed by them and you keep the policies active. Unlike term insurance, where you pay for protection against premature death for a certain time period or until you reach a certain age, with any permanent insurance policy, your beneficiary will receive a death benefit no matter what age you will pass away. In this webpage, we will delve into the unique features of each policy to help you make an informed decision.
How Permanent Life Insurance Works
Both of these policies have an insurance part and a savings part.
Every premium will pay for the insurance part first, then whatever maintenance fees they have and what is left is added to the savings part of the policy. The savings part is where the compound interest growth magic happens.
Since permanent life insurance has a saving component, the premiums are typically higher than term life insurance.
How Is A Whole Life Insurance Similar To An IUL?
A fourth similarity is that both of them work only for a long term plan. If you think that you can’t afford a long term game, don’t buy into any of them. Remember the 2 capital rules of what constitutes the best life insurance products:
- Have the insurance you can afford and
- Have the insurance that is in place when you pass away
- Policy Loans: Both Whole Life Insurance and IUL allow you to borrow against the cash value of your policy once it has accumulated sufficient funds.
- Tax-Advantaged Cash Value Growth: The cash value in both types of policies accumulates tax-free since the premiums are paid after taxes.
- Long-Term Perspective: Both Whole Life Insurance and IUL are designed for long-term financial planning. If you are unable to commit to a long-term approach, neither of these options may be suitable. Remember the two capital rules for choosing the best life insurance products.
While Whole Life Insurance and IUL share some similarities in how they operate, they differ significantly in various aspects such as payment flexibility, cash value growth rate, loan interest rates, and more.
In both permanent insurances, you have to be careful not to let them lapse or to have them surrender. The surrender charges and the potential taxes that you may incur will be devastating for your investment part (cash value) into permanent insurance.
WHOLE LIFE
- Premiums: With Whole Life Insurance, consistent premium payments are required for the agreed-upon period. The premium amount and the death benefit amount are established when the policy is written and they can’t be changed. However, in case of financial hardship, payments can be temporarily halted.
- Cash Value Growth: Whole Life Insurance guarantees a cash value growth rate typically between 2% to 3%. The returns are guaranteed but they are not that great. Sometimes the rate of inflation is bigger. You might be better of getting an annuity and a Term Life Insurance. Cash value is exposed to market losses which is probably the biggest disadvantage versus an IUL.
Dividends: Whole Life policies may offer dividends based on the insurance company’s annual performance. Dividends can range from 0% to 2% but are not guaranteed. They can be added to the cash value, withdrawn as cash, or used to offset premium payments.
Loan Interest Rate: If you need to take a loan against the policy’s cash value, the interest rate is typically around 5% or more.
INDEXED UNIVERSAL LIFE INSURANCE
Premiums: IUL provides more flexibility in premium payments compared to Whole Life Insurance. You have the option to increase, decrease, stop, or even use your cash value to pay premiums. Additionally, you can adjust your death benefit accordingly. There are high limits on the amount you can deposit towards your cash value accumulation (retirement) as long as the death benefit is appropriately adjusted.
Cash Value Growth: The growth of your cash value in IUL is tied to an index, usually the S&P 500 or other indices. The growth rate has a cap and a floor. The cap rate typically ranges from 10% to 15%, while the floor rate cannot go below 0%. This means that your cash value growth is capped at the specified rate, regardless of how well the index performs. However, the floor rate protects your cash value from losses when the index experiences negative growth.
- Dividends: IUL policies do not offer dividends.
- Loan Interest Rate: Most IUL policies allow loans of up to 90% of the cash value, and many policies charge a virtual 0% interest on these loans. The loan can be repaid from the death benefit upon your passing.
When comparing Whole Life Insurance and IUL, it becomes evident that Index Universal Life Insurance offers several advantages over Whole Life Insurance. Considering its payment flexibility, protection against market downturns, and favorable loan terms, IUL proves to be a compelling choice.
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Last updated: [8/17/2023]
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