When used appropriately, life insurance can be a very beneficial tool in a retirement income plan. However, do you know for sure which policy is the right one for you? To help you choose the right financial plan for your retirement, we have come up with a discussion on the differences between whole life insurance vs IUL.
Whole vs indexed universal life insurance (IUL) are two types of permanent life insurance policies without an expiration date. Both have cash value or money that can be withdrawn while you’re still living. Whole life insurance offers a predictable option due to its guaranteed cash value increase and constant premiums.
Moreover, an IUL policy allows premium adjustment, but cash value growth is determined by a market index. Understanding the differences between whole life vs IUL insurance can help you choose the best insurance type for your needs. A financial advisor can assist in selecting the right insurance and navigating through the choices involved in effective financial planning.
IUL vs. Whole Life Insurance What Are the Differences
The primary difference between indexed universal life (IUL) insurance vs whole life insurance is the way cash value operates. IUL vs whole life insurance offers lifetime coverage, but there are significant differences to consider before acquiring either type.
Death benefit
Whole life insurance offers a fixed death benefit, deducting the amount owed if a borrower borrows a loan against the cash value and dies before repaying it. However, an IUL allows for flexibility, as if the cash value account grows, the death benefit can be increased, leaving the beneficiary more than initially agreed upon.
Cash value
Whole life insurance policies offer a fixed, consistent cash value growth rate, typically small. The growth is linked to a stock market index IUL, with higher growth if the stock performs well and slower growth if it doesn’t. An IUL policy may be more suitable for those comfortable with stock market navigation.
Premiums
IULs are more expensive than whole life insurance policies, but their flexibility allows for cost offset without reducing death benefits. As cash value grows, IULs can be used to pay premiums but require more administrative oversight and a hands-on investment approach. Monitoring the cash value is crucial to prevent it from dropping below zero.
When considering options for providing for one’s family after death, whole life is thought to be the safest choice. Furthermore, whole life insurance includes a savings component that can grow tax-advantaged cash value alongside a death benefit. These plans could be described as “traditional” life insurance.
What is Indexed Universal Life Insurance (IUL)
One kind of permanent life insurance policy that never expires is index-indexed universal life insurance (IUL). Your policy will be in effect for as long as you continue to make payments. IUL policies include a cash value account that generates interest based on a stock market index, like the S&P 500. You can change the death benefit amount and use the cash value of your IUL to pay your premiums.
IUL policies are more expensive and difficult to manage than other types of permanent insurance, but they may offer more growth potential. High-net-worth individuals seeking to diversify their investments and maintain a sophisticated life policy should consider this type of coverage.
Advantages and Disadvantages of Indexed Universal Life Insurance (IUL)
Index-indexed universal life insurance includes coverage for permanent life insurance. IUL insurance policies have the same potential to accrue cash value as whole life insurance. The cash value may be lent against or left in the policy to increase in value.
Below is a summary of the advantages and disadvantages of IUL:
Benefits
- Adaptable premium payments.
- Possibility of earning more interest.
- The choice to take a loan against the policy or receive cash value at a later time.
Drawbacks
- Profits are influenced by equity performance.
- Index declines can lead to worse returns than whole-life policies, despite the presence of floors to limit losses.
- Possibility of premium increases in the future,
- Higher costs.
- If premium payments fall behind performance, the death benefit could be lowered or eliminated.
What is Whole Life Insurance
Whole life insurance is a type of permanent life insurance that provides lifelong coverage as long as premiums are paid. However, term life insurance only provides coverage for a predetermined amount of time, such as 20 or 30 years. Your beneficiaries will receive a guaranteed death benefit from a whole life insurance policy when you pass away.
As you get older, your premiums usually stay the same, and the policy gradually gains cash value. If necessary, you can take out a loan against that cash value or use it to pay your policy’s premiums. The death benefit paid to the beneficiary of life insurance is reduced by any outstanding loans upon your death.
Advantages of Whole Life Insurance
Whole life insurance provides coverage for your entire life, ensuring you don’t worry about coverage expiring, especially for lifelong care dependents. In addition, it earns interest through its cash value component, making it an excellent investment option for those already maximizing contributions to retirement accounts. Furthermore, withdrawing money or taking out a loan from the policy is easier and less expensive than personal loans.
Disadvantages of Whole Life Insurance
Whole life insurance is more expensive than term life, and canceling it during the surrender period may incur extra fees. In addition, it has lower returns compared to other investment options like a 401k or IRA. To keep the policy active, you must pay annually. Furthermore, if you borrow money from the policy’s cash value and die before paying it back, the policy will pay out less than the total death benefit amount.
Final Thoughts
In essence, index-linked universal life insurance combines a life insurance policy with an investment tool. If you still have money to invest but have used up all of your 401(k) or IRA contributions for the year, you might find that appealing. However, if you’re looking for lifetime coverage with a guaranteed death benefit, you might be more inclined toward whole-life insurance.