Indexed Universal Life vs. Whole Life Insurance (2024)

FAQs

What is the main difference between a whole life policy and a universal life policy? ›

Universal life policies provide flexible premiums and death benefits but have fewer guarantees. Whole life policies offer consistent premiums and guaranteed cash value accumulation. You can borrow against or withdraw the cash value with either a whole or universal life policy.

This type of life insurance offers permanent coverage as long as premiums are paid. Some of the drawbacks include possible limits on annual returns and no guarantees as to the premium amounts or future market returns. An IUL policy may be canceled if you stop paying premiums.

Whole life insurance is safer and simpler. IUL has higher upside potential, but is riskier and takes more work to manage.

Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns. An IUL insurance policy may be canceled if you stop paying premiums. IUL policies are generally best for those with large up-front investments who want options for a tax-free retirement.

In general, whole life insurance tends to be more expensive than a universal life policy. That's because whole life policies offer more stability, with a guaranteed rate of return, while returns on universal policies can vary depending on the markets.

Common riders include accelerated death benefits, long-term care riders, and disability income riders. Withdrawals and Loans: You can withdraw or take out loans against the cash value of your IUL policy.

IULs, different from Roth IRAs, don't have contribution limits and anyone can get them no matter their income. They come with tax perks like death benefits that skip estate taxes. But, Roth IRAs do limit contributions while letting your post-tax money grow without any taxes.

Indexed universal life insurance plans typically offer lower risk and allow for early cash withdrawals that you can't make with a 401(k). Only indexed universal life insurance policyholders receive a death benefit. Here are some scenarios that might fit both types of investments.

The main reason why IUL is considered a bad investment is because the S&P 500's total returns have undeniably outperformed Indexed Universal Life over any multi-decade timeframe. To make IUL vs. the S&P 500 look superior, life insurance agents have to isolate and cherry-pick the worst decades in stock market history.

Why do rich people use IUL? ›

Large, Tax-Free Death Benefit: The money paid to your beneficiaries is generally tax-free, allowing for the efficient transfer of a greater portion of your wealth. Tax-Deferred Growth: Your IUL policy's cash value grows tax-free, potentially increasing the amount you leave to your heirs.

A more complex product than term life insurance. Higher premiums than term life insurance. Could be costly if coverage lapses early.

When you die, the insurance company will pay the death benefit. No matter how much cash value you may have had in the policy the moment before you died, your beneficiaries can collect no more than the stated death benefit.

We typically only recommend IUL to ultra-wealthy, experienced investors who have maxed out all other investment vehicles. Our reason is that IUL has a high likelihood of failure in today's volatile market and does not yield the type of return that other investments will when the market does perform well.

There are two main types of permanent life insurance: Whole life insurance - Caters to long-term goals by offering consumers consistent premiums and guaranteed cash value accumulation. Universal life insurance - Gives consumers flexibility in the premium payments, death benefits and the savings element of their policy.

Variable life has a guaranteed death benefit, fixed premiums and higher cash value growth potential. Universal variable life offers flexible premiums and a changeable death benefit but slower cash value growth.

Cash value? The pros and cons of term and whole life insurance are clear: Term life insurance is simpler and more affordable but has an expiration date and doesn't include a cash value feature. Whole life insurance is more expensive and complex, but it provides lifelong coverage and builds cash value over time.

The main differences are that term life insurance has more affordable premium payments and a set end date, whereas universal life insurance premiums are significantly more expensive but last for the life of the policyholder.