Whole Life VS Index Universal Life
Do you want to know why we favor one type of permanent life insurance over the other?
Both of these insurances are a permanent life insurance. With both of them, you are guaranteed a death benefit as long as you satisfy the minimum requirements imposed by them. 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 heirs will receive a death benefit no matter what age you will pass away.
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 growth magic happens.
Since permanent life insurance has a saving component, the premiums are a lot higher than a term life insurance.
How Is A Whole Life Insurance Similar To An IUL?
A second similarity for both types of policy is the fact that once you have enough cash value in the policy, you can take a loan from the insurance company.
A third similarity is that the cash value accumulates tax free since the premiums are paid after taxes. This is how all insurance products work.
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
This is where all the similarities end and even though they work technically in the same way, they differ so much in the flexibility of payments, the rate of return for the cash value, the interest rate for the loans that you can take and several other factors.
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 into a permanent insurance.
- Premiums – they have to be made consistent for the period that you have agreed on. Payments can be stopped for a certain period in the event of financial hardship.
- Cash Value is guaranteed to grow at a rate between 2 to 3 percent. When you take into consideration that the rate of inflation has been between 3 to 4 percent …
- Whole Life policies offer dividends, based on the insurance company’s performance for that year. They can be between 0 to 2 % but they are not guaranteed. The dividends can be added to the cash value and can be left there to grow, you can take them as cash or use them to pay down your premium
- If you need a loan against the value of your policy the interest rate is around 5%
INDEXED UNIVERSAL LIFE INSURANCE
- Premiums – IUL’s offers more flexibility than a Whole Life insurance. You can increase, decrease, stop or even use your cash value to pay your premium payments and you can increase or decrease your death benefits. There is no limit as how much you can deposit towards your cash value accumulation (retirement) as long as the death benefit is adjusted accordingly
- The growth of your cash value is tied to an index (usually the S&P 500 index but it can also be any other index or a mixture of indexes). The interest rate of the growth has a cap rate and a floor. The cap rate is anywhere between 12 to 15% and the floor can’t be lower than 0%. It means that doesn’t matter how good the index does, you cash value will not grow for more than the cap rate of 12 to 15% but also if the index goes negative the floor rate of 0% will guarantee that the cash value will not have a loss. In the recent history, IUL’s had an average return of 8%. There is no guarantee that you will have that return. An IUL gives you exposure to the stock market but it does protect you against losses when the market tanks.
- There are no dividends in IUL’s
- If you want to get a loan against the cash value, most of the policies will loan you up to 90% of your cash value and the interest rate is a big fat 0 % on most policies. The loan can be paid off from the death benefit.
When you put these 2 permanent insurances head to head you can clearly see the advantages of one over the other. That is why we recommend an Index Universal Life Insurance.
If you would like to learn more about how an Index Universal Life Insurance works and if it is a good product for you, click here
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Hegemon Group International, LLC. (HGI) is a marketing company offering a vast array of products and services through a network of independent affiliates. HGI does not provide insurance products, real estate, legal or tax advice. In the USA, insurance products offered through Hegemon Financial Group, LLC (HFG); and in California, insurance products offered through Hegemon Insurance Solutions, LLC (California License #0I0198) – collectively HFG. HFG is licensed in all states and the District of Columbia, except Massachusetts. In Canada, insurance products offered through Hegemon Group International of Canada ULC in the provinces in which it is licensed.
Florin Chris Uta is an independent associate of HGI.
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