Individuals shopping for life insurance have an array of choices, ranging from inexpensive term life insurance to more comprehensive permanent life insurance policies. There are two popular options when it comes to permanent life insurance policies: whole life insurance and indexed universal life insurance (IUL).
Let’s take a look at the similarities and differences between these policies:
Since they are permanent life insurance contracts, both IUL and whole life offer the potential to build cash values and secure lifelong coverage.
Potential Cash Value
The cash value component can accumulate on a tax-deferred basis inside of your policy. You might use those funds for various goals down the road, including supplemental retirement income, college funding, or helping to pay the policy’s ongoing expenses. This can be accomplished via policy loans or withdrawals. Keep in mind that outstanding policy loans accrue interest and will reduce the cash value as well as the death benefit.
As long as you continue to pay the required premiums on time, your life insurance policy will remain in force — and coverage will last you a lifetime. As a result, policyholders can ensure that their beneficiaries will receive a death benefit to assist with living expenses or liquidity needs.
Both policies share similarities, but premium payments and cash values work differently.
Whole life: You receive a premium schedule at the time you establish coverage. Given you pay those premiums on time, your cash value will grow as illustrated, and your coverage will stay in force. For the same face value, whole life insurance premiums are initially higher than IUL premiums.
IUL premiums: These are more flexible — you can even temporarily delay premiums payments if you have sufficient cash value in your policy. However, if you do not pay enough into the policy or your cash value reduces, you may need to pay higher premiums down the road to keep up with insurance costs.
Whole life: Cash value growth is guaranteed, meaning you’ll know exactly how much you’ll have available at any given time. This is especially helpful for those who plan to use cash value for life goals like a target retirement date or a child’s college education.
Dividends: Some whole life companies offer dividend-paying policies that could provide additional value, although they are never guaranteed. If your policy receives dividends, you could use those funds to raise your death benefit, receive cash, scale back your premium payments, and much more.
IUL accumulation: Indexed universal life policies have what are called caps and floors. The cap rate is the maximum percentage that the insurance company will allow you to earn for the 12 month period. The floor rate is a percentage that the policyholder cannot fall below for the 12 months. IUL mirrors a specific index such as the S&P 500. When the index has positive results, it may be possible to accumulate a significant amount or stop paying premiums for a certain amount of time. However, if the index does not perform well and the cash value does not grow, you may need to pay higher premiums to keep the policy in force.
Interest crediting: IUL policies offer a fixed segment that earns interest at a specific rate, which can change over time depending on economic conditions. An indexed segment is linked to the performance of an index such as the S&P 500. These indexed segments have cap rates and floor rates.
Different Strategies for Varying Needs
Both whole life and indexed universal life policies are excellent permanent life insurance strategies.
If you prefer predictability, want to know how much cash value you will accumulate year after year, and always will know what your premium payments will be, then whole life may be more appealing to you.
On the other hand, IUL policies may be attractive if you desire flexibility and can afford the risk of having to pay more premiums in order to keep the policy in force due to insufficient cash value growth. IUL can have a higher upside as well as a higher downside than whole life policies. When assessing life insurance needs, it’s crucial to evaluate your long-term goals, current and expected future expenses, as well as desired security. For more information on finding a life insurance policy that works best for you, contact GE Insurance for Life today!