While you can’t control what tomorrow brings, you can prepare for it. That’s where life insurance steps in, helping to secure your loved ones’ future no matter what happens to you.
When it comes to permanent life insurance, there are two main options to consider: whole life and indexed universal life (IUL).
Each has unique features and benefits, making it essential to understand the differences before you go signing on any dotted lines.
We’ll dive into what sets these policies apart so you can choose the one that best suits your needs and provides for your family after you’re gone.
What is Whole Life Insurance?
Whole life insurance is a permanent policy that provides lifetime coverage and peace of mind.
With this policy, you pay fixed premiums that never increase, and your beneficiaries receive a guaranteed death benefit. Plus, whole life insurance has a cash value component that grows at a steady, guaranteed rate over time.
One big benefit? You can even borrow against this cash value if you ever need funds.
The downside? Whole life insurance tends to have higher premiums than other policies, and it’s less flexible with payment options. And if you withdraw or borrow from your policy, that will likely reduce the death benefit.
What is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance that offers flexibility in both premiums and cash value growth.
Unlike whole life insurance, which grows at a fixed rate, the cash value in an IUL policy is tied to the performance of a stock market index, like the S&P 500. This means the policy’s cash value has the potential to grow faster when the market performs well.
One of the biggest advantages of IUL is its flexibility. You can adjust premium payments based on your financial situation, and as the cash value grows, the death benefit may also increase.
But, this flexibility and growth potential come with some risks. Because cash value is linked to market performance, returns aren’t guaranteed, and if you have an increasing death benefit as opposed to a level death benefit, costs may rise as you age.
Key Differences Between IUL and Whole Life Insurance
The main difference between IUL and whole life insurance lies in how their cash values grow. Whole life insurance offers that guaranteed growth at a fixed rate, making it a much more low-risk option for those wanting reliable accumulation.
But, since IUL’s cash value growth is linked to the performance of a market index, it does have the potential for higher returns. That does mean, however, that growth isn’t guaranteed and can fluctuate with the market. In market down years, for example, your policy won’t grow at all. The good news is your IUL will be protected by a 0% floor, but your policy is still subject to fees.
Premiums also vary. Whole life insurance requires fixed premiums that stay the same over time. IUL policies allow for flexible premiums, which can be adjusted as financial needs change—a convenient option for those looking for flexibility.
The death benefit of whole life insurance is predictable, providing a set amount to beneficiaries. With IUL, though, the death benefit can increase as cash value grows, though how much it grows depends on market performance and isn’t always assured.
Whole life is a more conservative choice with steady returns, while IUL is a more aggressive option with the potential for higher returns, but that growth isn’t guaranteed, due to its stock market link.
Which One is Right for You?
Look, we can’t tell you which policy will be best for your situation. Factors like your family, your job, your location, and more all play a role in determining what plan would suit you best.
A whole life insurance policy could be the one that you want if you prefer stability and extra predictable returns. It’s the standard life insurance you hear of without extra bells and whistles. Whole life insurance offers you the lifelong coverage you’re looking for with guaranteed benefits. If you’re looking for a “safer” investment option, whole life fits the bill.
But if you’re open to non-guaranteed growth for potentially higher returns, you might want to consider an indexed universal life insurance policy. Plus, that nifty guardrail of a 0% floor keeps you from losing anything due to market volatility, and IULs grant users added flexibility when it comes to premium payments. So, if you’re interested in using life insurance as a supplement for tax-free retirement income, IULs are the way to go.
The Wrap-Up
IUL and whole life insurance are both favored policy types, but their differences are significant. Whole life offers guarantees, but IUL can offer far greater returns.
But before making your decision between an IUL and a whole life insurance policy, sit down and assess your financial goals and preferences. Consider how you want your money to grow, how you want to live in retirement, and what financial risk you’re willing to take on.
If you’d feel more confident with the help of an expert, go ahead and consult a financial advisor for more personalized guidance.