Whole Life vs IUL: Which Is Right for You?

Let’s settle the whole life vs IUL debate once and for all. It’s not a debate about right or wrong but about choices. I’m here to keep you updated on the latest technology, and the IUL stands out as the superior engine for growth. 

Whole life insurance is a policy that remains in force for the insured’s entire lifetime as long as the premiums are paid through to the maturity date. Whole life is best understood as the opposite of a term life insurance policy, in which the policy is only in force at its original premium for a specified period (the “term”), say twenty or thirty years, during which the policyholder is statistically very unlikely to die.

Suppose the policy is not canceled at the end of the term. In that case, premiums typically escalate dramatically, which means that the closer the policyholder gets to the likelihood of really needing the policy, the more unaffordable it becomes. 

The uncapped Index Universal Life (IUL ) is also a form of life insurance. Both have a health qualification and offer a death benefit for the spouses of veterans. However, the death benefit is not the primary or most attractive feature of the IUL. The real benefit of the IUL is its capacity to be a cash accumulation vehicle. It also offers significantly more equity growth and fewer restrictions for accessing your money than Whole Life. 

What is Whole Life?

In the 1990s, some financial firms catering to military and veterans began selling whole life insurance to privatize the protection of a military pension. Whole-life policies offered a permanent solution to estate planning, something that a 30-year term policy could not do. They were typically provided in conjunction with retirement plans.

These plans are very attractive at a high level. They provide a death benefit for the insured’s loved ones and allow them to leave a permanent legacy.

At some point in retirement, the policy is paid, and the insured no longer has to make payments. They can also continue increasing their coverage every few years with paid-up additions. If the insured pays a little more, they can get more insurance.

The Problems with Whole Life 

While Whole Life insurance can offer both equity and permanent coverage, which term policies cannot do, Whole Life policies have some flaws.

Whole life insurance has remained the same for many, many years. Using these old policies for estate planning today is like choosing to work on an old IBM PC from the 1990s. Sure, it performs the same underlying functions, but it lacks decades of innovation and is not the best tool for the job.

These policies can be very confusing, not only to those who buy them but also to those who sell them. Most agents need help understanding what they are selling, so they do not necessarily recommend them because they are the best tool available for an individual client’s situation; rather, these agents are just doing what they’re told to do by their agency.

Neither do many agents understand the unique situation of military/veterans.

To compound the problem, many veterans who purchase whole life insurance need help understanding what they buy. It is not uncommon for someone to find out five or ten years into paying for a whole life insurance plan that they can get the same or similar death benefit for a fraction of the cost with a term policy.

However, comparing a term policy to any permanent policy is comparing apples to oranges. 

Veterans who decide that switching to a term policy makes better out-of-pocket-right-now sense end up losing the equity they had built into their Whole Life policy, even if it was only a few thousand dollars. 

Much of the cost of a Whole Life policy is paid for upfront, which means that, like a mortgage, it can be a decade or more before you have built usable cash value equity.

Although that equity can be accessed tax-free later in life, a loan provision often stipulates that you must pay the company to access your money, just like you would get a home equity loan from a bank to access “your” equity in a home.

You’ll be charged interest if you take a loan against your policy’s cash value. If you don’t repay the loan, it will be deducted from the death benefit when you pass away. 

Finally, a traditional Whole Life insurance policy offers little equity. Market interest rates severely limit the return on investment (ROI). These policies see growth comparable to a bank Certificate of Deposit (CD).

That’s not an intelligent way to leverage compound interest over 30+ years. The interest is credited to the equity as “declared dividends.”

The dividend is when the company’s board of executives meets at the end of each year and determines how much of its profits it wants to give back to policyholders. Those profits came from the policyholders, so it’s more like a rebate than a dividend. Historically, those profits and rebates decreased as more investors moved away from Whole Life.

All things considered, while you may end up realizing some benefits from your Whole Life insurance policy decades after initiating one, there are far better things that you can do with your money that will benefit you more and sooner than Whole Life.

What is the IUL?

The IUL is an investment-grade, private placement, free-market life insurance policy. It is an entirely new approach to privatizing a pension and represents a significant technology shift from the Whole Life policies sold to veterans and military personnel in the 1990s.

The modern IUL can protect the death benefit of a Whole Life or term policy while allowing you to produce an annuity stream. This is much like a military pension because you can use it while the veteran is alive!

An annuity stream is a series of regular, guaranteed payments from your IUL that provide a steady income during retirement. This feature makes the IUL a powerful tool for retirement planning. 

After 30 years, the ROI on the IUL is significantly higher than on a Whole Life policy. In the best-case scenario, Whole Life plans usually grow between two and four percent compounded annually. The death benefits are also typically significantly higher than needed because they are sold as an alternative to term instead of a compliment.

This benefits the agent (not the client), who gets paid much more for selling Whole Life. As a result, the cost of insurance is also very high. It takes about 10 to 15 years of regular contributions for an insured person to fully cover the cost of Whole Life before they break even and can access any equity. 

Whole Life vs IUL: How is the IUL Different from Whole Life?

The IUL differs from Whole Life in some fundamental ways.

Funding

While you can fund an IUL with a single lump payment spread out over a few years, you don’t have to. You have total flexibility in funding. You can contribute as much or as little as you want, over as short or as long a period as you wish.

You can also set up monthly contributions to increase, decrease, or stop anytime. Unlike with Whole Life, however, you are contractually obligated to make the same monthly payment month after month, year after year. 

Mechanism for Market Growth

Like Whole Life, the IUL is a permanent insurance policy accumulating equity. However, equity growth in a Whole Life policy is based on the federal bond rate. In contrast, equity growth in the IUL is based on the S&P 500 performance.

With the IUL, you get guaranteed principal growth when the stock market is up and protection from losses when the stock market is down. This risk-free investing is possible because these insurance companies use an options-indexed investing strategy. 

They take a little cut of the gains on your principal in exchange for guaranteeing that you will never lose money in the stock market.

You’re going into partnership as investors: your money plus their expertise and the purchasing power they can wield by combining your money with other IUL account holders. His safeguard against negative market returns allows you to comfortably fund your retirement and leave a legacy behind you when you die. 

Cash Value (Equity) in an IUL Offers Liquidity

While you will have to wait a decade or more to access any significant equity in a Whole Life policy, the IUL offers liquidity anytime, for any reason, without penalty. The IUL has a cash surrender value. The surrender value refers to the liquid cash available for distribution without penalties or taxes.

Suppose a person keeps 10% of the cash surrender value inside the plan. In that case, they can do whatever they want with the other 90%, comprising a combination of contributions and the returns on invested dollars.

Furthermore, you can use your money for what you need when you need it, while it grows in value when the market is on the rise. For more information about how this works, see this article. 

Qualification

Most of the policies that were sold to veterans in the 1990s and since then don’t offer any advantages for being in good health beyond smoker and non-smoker rates. When you qualify for an IUL, your good health will be rewarded with lower premium rates. That said, if you are not in excellent health, don’t let that deter you from qualifying.

The health qualification determines the amount of the death benefit the insurance company will offer you. The better your health, the more death benefits you can qualify for.

However, as I explain below, with an IUL, we are not looking to maximize the death benefit. While there are many health issues and disabilities that affect veterans, very few of them have any significant impact on a veteran’s ability to qualify for the IUL.

The IUL Is About More Than Just a Death Benefit

The costs of an IUL vary depending on the death benefit amount, which is a lump sum payment to the policyholder’s named beneficiary should the policyholder die while the policy is in force.

By setting up your policy with the lowest possible death benefit, we can lower your costs and reduce the time it takes to fund your policy fully and, thus, the time before you can begin to access your money. 

Doing this also maximizes your money’s growth. Again, the IUL is not about the death benefit. It is about getting tax-free growth on your money. 

The IUL Offers Additional Benefits

An IUL also offers additional benefits, like the ability to pay for long-term care. A Whole Life policy does not provide these benefits.

What If You Already Own a Whole Life Policy?

Service members and veterans who have already invested in older whole life insurance plans can redirect that investment into an IUL and whatever other contributions they want to make using an IRS mechanism called a 1035 exchange.

Moving these funds into an IUL using the 1035 provision allows returns on your investment to take effect much earlier than the 10 to 15 years it can take for a Whole Life policy to mature.

In summary, the primary differences between Whole Life and IUL are lower costs, more significant principal growth, and more liquidity. With an IUL, 90% of your money is liquid and available whenever and for whatever you need. 

Suppose you are not in a position to fund an IUL aggressively or commit to it for the long term. In that case, there are better financial vehicles for you.

Instead, you should apply for convertible term insurance. The convertibility feature allows you to get qualified and approved death benefit coverage at a low cost while also giving you the option to fund an IUL at a later time.  

But what we have found is that for individuals who do not want to follow the traditional path from military service to a 9-to-5 job to retirement, for those who wish to devote their post-military lives to a new means of service that involves starting a business or any other kind of lifestyle that will require the availability of funds much sooner than the average retirement age.

IULs offer an advantage over a Whole Life policy because they include sensible financial protection for the family (tax-free retirement income, long-term care protection, a legacy for heirs, etc.) and the flexibility, control, and liquidity that will allow these individuals to forge their path.

If you think that the IUL might be right for you, or if you are interested in getting more information about how to convert your existing Whole Life policy into an IUL using a 1035 exchange.

I hope you’ve found this information helpful as you decide about life insurance. Whole Life and IUL are both great options. However, based on the current market and technology available, IUL is the better growth engine.

If you have any questions or would like to schedule a consultation. We are here to help you make the best decision for your family.