Permanent life insurance is essential for any long-term financial plan. Most policyholders sign up for Whole Life Insurance to protect their family’s income. However, many people are now opting for another common policy—Index Universal Life Insurance (IUL). Which is the better option: IUL or Whole Life Insurance?
We promise it’s not as complicated as you think.
In this article, we explain how Whole Life Insurance works and why it may benefit you and your loved ones. We also break down Index Universal Life (IUL) vs. Whole Life Insurance to help you compare the most popular policy options on the market right now, and help you figure out which is the best policy for you.
What Does An IUL vs. Whole Life Insurance Policy Offer?
Consider both Index Universal Life and Whole Life Insurance as safety blankets for your family’s immediate financial needs after you die. In exchange for regularly paid premiums, your beneficiaries are guaranteed a lump sum of cash whether you have an IUL or Whole Life Insurance. We call this money your death benefit, and your family can use it to cover:
- Burial costs;
- Funeral arrangements;
- Household necessities; or
- Other personal affairs.
As with most permanent life insurance policies, Whole Life Insurance includes a cash value (or cash savings) account that grows at a fixed rate throughout your plan. Cash value is one of the most attractive features of permanent life insurance in general because it allows you to use your policy as an investment vehicle and earn money while you’re still alive. You can cash out your investment profits at any time, whether you’d like to spend them on personal projects or borrow against them for a business loan.
Index Universal Life Insurance also has a cash value account. However, the difference between IUL and Whole Life is that the interest rate for Index Life Insurance changes based on stock market performance. As a result, there’s potential to earn more money with IUL vs. Whole Life.
Whole Life Insurance policies are also eligible to receive dividends – refunds on a percentage of the premiums you’ve already paid – that can be reinvested into your accumulating cash account. Unlike Whole Life Insurance, there’s no additional source of money coming into your Index Universal Life Insurance account. This is one of the main downsides of IUL vs. Whole Life Insurance policies since dividends can increase your overall cash value.
What Happens if I Need to Surrender My Policy?
Unfortunately, some policyholders are forced to cancel their policies due to unexpected financial constraints or tragedies resulting in their beneficiaries’ death. Others manage to pay their debt before passing away, so they no longer see a need to leave behind death benefits.
If you decide to cancel your Whole Life Insurance policy, your beneficiaries won’t receive any death benefits when you die. Additionally, your insurance provider will incur a fee on whatever cash value you’ve amassed throughout your plan. We call these surrender charges because, technically, you’re surrendering your life insurance policy.
Once your provider deducts these charges, you’ll receive the balance of your accumulated cash value, tax-free. The terms for canceling your life insurance policy are the same for both IUL vs. Whole Life Insurance.
When Does Whole Life Insurance Mature?
The main similarity between IUL and Whole Life Insurance is that they’re both permanent life insurance policies; so in theory, they do not expire. Despite that, some life insurance providers still include a maturation date within your policy terms. If your policy matures, you’ll be paid the death benefits indicated in your contract.
The problem, even when comparing IUL vs. Whole Life, is that the IRS taxes the money you receive upon expiration. Fortunately, there’s a solution: you can apply for a life insurance maturity extension to prolong the duration of your policy.
Life insurance expiration dates were a greater issue before 2009 because policies would mature at 90 or if you were lucky, 100 years. The pressure’s off now because most insurance plans today are set to mature when the policyholder turns 100 at the earliest. The furthest age we’ve seen so far is 121.
With this in mind, the odds are slim that the average American will need to reapply for coverage. Besides, life insurance expiration isn’t something you need to worry about when comparing IUL vs. Whole Life Insurance.
Is Whole Life Insurance a Good Policy Option?
When comparing IUL vs. Whole Life, the advantages of Whole Life Insurance make it the most commonly purchased permanent life insurance policy on the market.
One main feature that makes Whole Life a good option is its tax-deferred death benefits. This means that your beneficiaries won’t have to pay any fees to the IRS from the funds they receive from your insurer. Moreover, when looking at IUL vs. Whole Life, Whole Life Insurance premiums going toward your cash value account are not tax-deductible.
Your cash value withdrawals are also tax-free. However, insurance providers will charge interest on policy loans against your cash value amounts.
Whole Life Insurance can be a good policy option for people who want to guarantee that their heirs will receive a designated amount of death benefits. On the other hand, it may not be best for you if you plan on making full use of your investment profits (which is why an IUL vs. Whole Life comparison is necessary prior to purchasing your policy). This is because life insurance providers deduct the cash value you’ve used from the total death benefits they release to your family.
It all comes down to a trade-off: enjoy your living benefits to the max and deplete your family’s inheritance, or use your cash value sparingly (or not at all) to ensure your heirs receive the entire lump sum of your policy.
IUL vs. Whole Life Insurance: Which is Better?
While IUL and Whole Life Insurance both include investment opportunities, they work differently.
What is the key difference between IUL vs. Whole Life, you might ask? Simple: Whole Life Insurance offers a fixed premium, death benefit amount, and interest rate which you determine at the beginning of your contract. Those terms won’t change throughout your life insurance coverage.
On the other hand, Index Universal Life Insurance is more flexible. When comparing IUL vs. Whole Life, IUL Insurance policyholders can adjust their death benefits at any time to suit their budget. This automatically lowers their death benefits. Also, IUL cash value increases based on stock market performance, causing investment interest rates to vary by the season.
With that being said, which one should I choose? IUL or Whole Life?
Based on my expertise and what I’ve seen and done for several clients who wanted to purchase the right life insurance policy, Whole Life Insurance is best suited for people who want consistent insurance terms. Index Universal Life may be a better option if you prefer more flexibility in your policy.
IUL vs. Whole Life: How Much Whole Life Insurance Do I Need?
The value of both IUL and Whole Life Insurance varies on a case-by-case basis. The cost of your life insurance policy will depend on your age, medical history, and current employment. The lower your premiums, the smaller the death benefit your beneficiaries receive.
This isn’t necessarily a cause for concern—if you have fewer dependents and limited debt, there’s no pressure to invest in a large policy.
IUL vs. Whole Life: How Much Does a Policy Cost?
Ultimately, your risk level determines how much you’ll pay for your IUL or Whole Life Insurance coverage. It may sound morbid, but one key factor that comes into play in life insurance policy pricing is statistics and probability.
Older applicants and those with chronic health conditions are considered high risk because, statistically speaking, they are more likely to die in the near future (unfortunately). As a result, they tend to have higher premiums than younger applicants in general.
Your IUL or Whole Life Insurance policy pricing is also affected by your income bracket and socioeconomic status. On any given day, if you fail to pay your scheduled premiums, the insurance provider has the right to terminate your life insurance policy. Therefore, it would be in your best interest to select a policy that your income can sustain in the long run.
This is why at The Purpose of Money, we provide free guided consultations to help you identify the best life insurance policy for you, even if you are still comparing IUL vs. Whole Life policy options. One of the main techniques we encourage clients to do is shop around before making a purchase. Some Index Universal Life and Whole Life Insurance companies will offer higher quotes than their competitors regardless of the risk profile.
Prices may increase if you include riders (additional features) – such as Waiver of Premium, Accelerated Death Benefit, and Long-Term Care – to your basic life insurance policy. Nevertheless, long-standing companies tend to offer expensive premiums simply for their reputation in the industry.
An experienced financial agent can help you compare IUL vs. Whole Life policies and find the best insurance quotes on the market that cater to your needs.
IUL vs. Whole Life: Does Whole Life Insurance Make Sense For Me?
Whether you are looking at IUL or Whole Life, purchasing a new life insurance policy can be a complicated process, especially for someone who’s unfamiliar with the industry. Whole Life Insurance is only one type of permanent life insurance, and it may not necessarily be the best policy for your situation.
That’s why it’s important to consult with an expert who can help you understand your options before choosing a life insurance plan.
Ready to take control of your finances, or have more questions about IUL vs. Whole Life insurance policies? Book a free consultation with me now so we can assess your financial situation and find the right life insurance policy for you!