It’s always a good idea to purchase a life insurance policy to ensure that your family is set financially in the event of your retirement or death. But, with all the different life insurance policies on the market, it can be difficult to know which one is right for you.
It can get confusing trying to determine which gives the best benefits with the least risk. If you’re not careful, you could end up overpaying for a policy that doesn’t give you the coverage you need.
Permanent life insurance policies, like whole life and indexed universal life (IUL), can provide lifelong coverage and potentially accumulate cash value. But you should be aware of some key differences between these two types of policies before making a decision.
This blog post will compare whole life and IUL policies so you can decide which one is right for you and your family.
Understanding IUL Insurance
Indexed Universal Life (IUL) is a type of permanent life insurance that offers death benefit protection and cash value accumulation. IUL policies allow policyholders to earn interest based on the performance of an equity index.
While the interest rate on an IUL policy is often higher than what you would earn from a traditional savings account, there are still some risks involved. If the index performs poorly, you could earn little to no interest on your policy.
IUL policies are flexible, which can benefit you if your needs change over time. For example, you can usually increase or decrease the death benefit on your policy as your needs change. You can also use your policy’s cash value for things like long-term care or supplemental income in retirement.
The cash value of your Index Universal Life policy grows tax-deferred, so you won’t have to pay taxes on the money until you withdraw it. And, if you need to access your policy’s cash value, you can usually do so without having to pay taxes on the money.
Policyholders also have the option to borrow against the cash value of their IUL policy. Although you don’t have to repay the loan, it will reduce the death benefit paid to your beneficiaries.
Advantages and Disadvantages of IUL Insurance
You should be aware of some advantages and disadvantages of IUL before purchasing a policy.
Advantages
- Lifelong coverage: IUL policies offer lifelong coverage as long as you continue to pay the premiums.
- Guaranteed benefits: IUL policies often have a death benefit assured, regardless of how the markets perform.
- Flexible payments: IUL policies usually have flexible premium payment options, which can be beneficial if your budget changes over time.
- Potential higher interest rates: IUL policies have the potential to earn higher interest rates than traditional savings accounts and Whole Life Policies.
- Option to use cash value: IUL policyholders can borrow from their policy’s cash value or use it for supplemental income in retirement.
- Protection from Market Loss: IUL policies will never lose value due to market loss.
Disadvantages
- Dependent on equity index performance: IUL policyholders’ interest rates are based on the performance of an equity index. If the index performs poorly, you could earn little to no interest on your policy.
- Fluctuating interest rates: IUL policies can have low returns as interest rates can go up or down, depending on the index’s performance.
- Reduced benefits: If you borrow against the cash value of your IUL policy and don’t repay the loan, it will reduce the death benefit paid to your beneficiaries.
- Higher expenses: IUL policies typically have higher premiums than other types of life insurance policies. The premiums can also increase over time, if not properly structured in the beginning.
Understanding Whole Life Insurance
Whole life insurance is a type of permanent life insurance considered the safest type of policy. It offers guaranteed cash value accumulation and death benefit protection.
Whole life policies have level premiums, which means the premium you pay each month will remain the same for the duration of the policy. Your insurance company will pay a fixed interest rate for a portion of your premium payments into the policy’s cash value account.
The cash value of your whole life policy grows tax-deferred, so you won’t have to pay taxes on the money until you withdraw it. And, if you need to access your policy’s cash value, you can usually do so without having to pay taxes on the money.
Whole life insurance policies also offer guaranteed death benefits. This means that your beneficiaries will receive the death benefit after you die.
Advantages and Disadvantages of Whole Life Insurance
It’s essential to understand the advantages and disadvantages of whole life insurance before purchasing a policy.
Advantages
- Lifelong coverage: Whole life insurance offers lifelong coverage as long as you continue to pay the premiums.
- Guaranteed death benefit: Your beneficiaries will receive the death benefit after your death.
- Guaranteed cash value accumulation: The cash value of your whole life policy will grow guaranteed, regardless of how the markets perform.
- Fixed premiums: The premium you pay each month will remain the same for the duration of the policy.
- Flexible payment options: Whole life policies usually offer the option to pay up the face value of the policy in 10 years, 20 years, or at age 65.
- Flexible dividends: Whole life dividends can be used to pay premiums or to increase the death benefit. They can also be withdrawn as cash or used to purchase additional coverage.
- Option to use cash value: Whole life policyholders can borrow from or surrender their policy’s cash value.
Disadvantages
- Higher premiums: Whole life insurance premiums can be more expensive compared to term insurance policies.
- Fixed premiums: The premiums you pay for a whole life policy are fixed, which means they must be consistently paid even if your financial situation changes.
- Low-interest rate: The interest rate on whole life policies is not guaranteed and is usually lower than the rates offered by other types of investment accounts.
Setting the Two Apart
Now that you understand the basics of IUL and whole life insurance, let’s take a look at some of the key differences between these two types of policies.
Insurance Flexibility
IUL policies offer more flexibility than whole life insurance policies. IUL policyholders can choose how their premium payments are invested and can adjust their coverage as their needs change.
Whole life insurance policyholders do not have as much flexibility. The premiums for whole life insurance are fixed, and the death benefit is typically set when the policy is purchased.
Premiums and Fees
IUL premiums can increase over time while whole life premiums remain level. This means that your monthly premium payments could become unaffordable if you choose an IUL policy with high premiums.
You must pay whole life premiums consistently to keep the policy active. If you fail to make a payment, the company could cancel your whole life policy. You can skip IUL premiums for as long as you have sufficient cash value left in your policy.
Value Growth
IUL policies offer the potential for cash value growth, while whole life insurance policies offer guaranteed cash value growth. This means that IUL policyholders could see their cash value grow more quickly if the indexes perform well. However, there is also the risk that the cash value of an IUL policy would decrease due to the life insurance cost. But, IUL policies will never decrease in cash value due to a poor performing index.
Death Benefits
IUL policies typically have death benefits equal to the policy’s death benefit and in some cases cash value as well. This means that if you die while your IUL policy is active, your beneficiaries will receive at least the death benefit or the policy’s cash value whichever is greater.
Whole life insurance policies typically have death benefits equal to the policy’s face value. This means that if you die while your Whole Life policy is in force, your beneficiaries will receive the death benefit.
Which One Is Right for You?
The answer to this question depends on your individual needs and circumstances. No one policy is better than the other across the board.
When deciding between an IUL policy and a whole life insurance policy, it all comes down to what you need and what you’re looking for in a life insurance policy.
If you’re looking for a life insurance policy with the potential for cash value growth, then an IUL policy might be right. On the other hand, if you’re looking for a life insurance policy with guaranteed cash value growth, then a whole life insurance policy might be a better option.
Whole life insurance might be the best choice if you want a reliable policy that offers little to no risk. Alternatively, if you’re willing to take on some risk in exchange for the potential for higher returns, IUL could be the better option.
The best way to decide which one is right for you is to speak with a financial advisor or life insurance agent about your options. They can help you understand the pros and cons of each type of policy and can help you find the right policy for your needs.
Talk To a Safe Wealth Agent
If you’re interested in learning more about IUL vs whole life insurance, or if you want to compare quotes for IUL and whole life insurance policies, Safe Wealth Plan can help. We can connect you with an experienced agent that can help you understand the differences between these two types of policies and can help you find the right policy for your needs.
