Differences between IUL and Whole Life Insurance

index universal life insurance and whole life insurance

Two of the most popular life insurance policies in the US currently are Index Universal Life Insurance and Whole Life insurance policy. They are both permanent life policies and offer many similar features. Go through the contents of this blog to understand which one is cut out for you!

  1. How do they resemble each other, Whole Life and Indexed Universal Life?
  2. How do IUL and Whole life policy differ from each other?
  3. How cash is accumulated for a Whole Life insurance policy?
  4. How does cash value accumulation work for IUL Indexed Universal Life insurance?
  5. Which one is better for you and how?

How do they resemble each other, Whole Life and Indexed Universal Life?

Permanent Coverage

Both the IUL and whole life offer permanent coverage. It relieves you from the stress of the policy getting expired. Only a permanent life insurance policy guarantees a huge death benefit payout for your loved ones, after your death. There is literally no downside to buying any permanent life insurance policy.

As long as you keep paying the monthly premiums, your policy stays in effect. The good part is that even if you surrender a permanent life policy, you still get to keep the cash value. Even if you become unable to pay premiums, monthly or annually, you can sell it.

Any permanent life policy worth more than $100,000 easily gets sold off in the secondary market, especially if the policyholder is more than 65 years old. You get a huge lump-sum of money by selling it too. Selling your life insurance policy is technically called a “Life Settlement”.

Potential Cash Value

Both whole life and indexed universal life are permanent so they offer a cash value component. This cash value component gets built up over time from the premiums. It is a cash component which you can access for urgent financial issues, during the lifetime of the policyholder. It can be used for withdrawal of loans, withdrawal against cash value, borrowing from it.

Either way it lends you as high as 90% of the present cash value for any money issue like college expenses for a child, emergency medical expense, house redecoration etc.

The money in cash value grows tax-free and with interest on it. This accrued cash value is better than a high yielding savings bank account! Both whole life and IUL have large cash value accounts that grow over time.

How do IUL and Whole life policy differ from each other?

Premium payments

For a whole life policy; the premiums are fixed at the time of signing your life insurance policy contract. This amount does not vary throughout your life. The fixed premiums can be paid monthly, quarterly, or annually, as you prefer. But the fixed premiums make it predictable and offer monetary stability.

Whereas, for indexed universal life, the premiums are flexible. According to the circumstances of the policyholder, he can pay more or less. In the beginning, he has to keep up premiums, but after a decade, when the cash value grows significantly, he can skip premiums too. Premiums would be deducted from his cash value every month, automatically. But if he takes out 90% of the cash for any urgent need, and his investment cash suffers consistent losses, his policy can lapse.

To prevent his IUL policy from lapsing, he will pay 3 to 4 monthly premiums together at times, to make the cash value account stable again. So flexible premiums can be a blessing as well as a curse!

Cash value Growth Mechanism

For a whole life, it’s all about stability! With fixed premiums every month, the cash value keeps accruing over time. You always know how much money is available in it at any time. It grows with tax-free premiums and interest of 3%-10%.

For indexed universal life, some portion of your cash value has same interest and premium money accumulation. But some portion of it is invested by floors and caps, in the S&P 500 Index. With the upward or downward trend of the index, you make profit or loss, respectively.

How cash is accumulated for a Whole Life insurance policy?

Cash keeps getting collected with every monthly premium. There is a certain interest applied on this money. This is tax-free money that you can borrow. You can withdraw as much as 90% of the total cash value account money at one time. You have no pressure to pay it back immediately. It has minimal loan interest applicable on it.

Whole life insurance is for people looking for steady growth on their life time premiums. People who want 100% protection for their loved ones after their death. It is reliable and your dependents will be able to take care of mortgage loans, child education, funeral charges, and an income replacement; after your death.

How does cash value accumulation work for IUL Indexed Universal Life insurance?

For indexed universal life insurance, you will be investing a major portion of your cash value for the stock index market. It is with limited risk due to floors and caps. But realistically speaking, it seldom reaps the rewards of a direct investment.

Whether you gain or lose, the life insurance firm takes its share to keep up its costs. The caps and participation rates limit an already small profit from the upward stock index trend. It is advisable for people who have an appetite for risk. Having a risk-taking nature is impressive, but if you’re staking the financial future of your family on it, it’s rather dumb!

However, people with money and investment expertise should keep it as an investment tool. And buy a real life insurance for covering their dependents.

Which one is better for you and how?

Always seek professional counsel while shopping for life insurance. It does not come cheap and as selfless as the purpose of life insurance is, it is a decision one should make with some education. Consult a licensed independent broker of NAPFA National Association of Personal Financial Advisors.

In a nutshell, if you have a large number of dependents to cover, and a mortgage loan, and school going children; go for Whole life insurance policy.

If you do not have many expenses, have other necessary life insurances; and you have a past in the investment arena. Explore the features of indexed universal life insurance policy, as an investment tool.

Difference between IUL and whole life is that indexed universal life is for investment and risk takers whereas whole life is for people who prefer stability! For indexed universal life or whole life, get your quote today from Insure Guardian!