Each type has unique features, and understanding the differences can help you choose what may be best for you and your family.
How they're the same
To compare and contrast, get familiar with some of the shared features available from both types of policies. Because they are permanent life insurance contracts, whole life and IUL both offer the potential for building cash values and securing lifelong coverage.
Potential cash value: Cash value can accumulate and grow tax-deferred inside of your policy. You might use those funds for a variety of goals later, including supplemental retirement income, education funding or to help pay the ongoing expenses in your policy. This can be accomplished through policy loans or withdrawals. However, it's important to note that outstanding policy loans accrue interest and reduce cash value and the death benefit.
Permanent coverage: As long as you continue to pay your required premiums on time, your policy remains in force. Coverage can last for the rest of your life - regardless of how long you live. As a result, you can ensure that heirs receive a death benefit to help with living expenses or liquidity needs.
How they're different
While whole life and IUL share several similarities, premium payments and cash values work differently.
Premium payments
Premiums are typically monthly or annual payments you make to your insurance company. Your preference on how to handle premiums may help you decide which type of policy is best for you.
Whole life: With whole life policies, you receive a premium schedule at the time you establish coverage. As long as you pay those premiums on time, your coverage is guaranteed to stay in force, and your cash value will grow as illustrated. But for the same face value, whole life premiums are typically higher than IUL premiums at the beginning of your policy.
IUL premiums: IUL premiums are flexible. You can even skip premiums temporarily if you have sufficient cash value in your policy. However, if you pay too little into the policy or your cash value dwindles, you may need to pay higher premiums in later years to keep up with the costs of insurance.
Cash values
Although whole life and IUL policies can potentially provide cash values, those balances grow in different ways.
Whole life: Your cash value growth is guaranteed in a whole life policy. You know exactly how much you'll have available at any given time, assuming you make the scheduled premium payments. That's helpful for those who plan to use cash value for critical goals like a specific retirement date or a child's first year in college.
- Dividends: Dividend-paying policies may provide additional value, but dividends are never guaranteed, and some policies don't offer dividends. If your policy receives dividends, you can typically use those funds to raise your death benefit, receive cash, reduce your premium payments and more.
- IUL accumulation: The cash value growth in an IUL policy is subject to caps and floors and is based on the performance of a specified market index, such as the S&P 500. With good results, it may be possible to accumulate a significant amount of cash value or stop paying premiums for a period of time. However, if your cash value fails to grow, you may need to pay higher premiums to keep the policy in force.
- Interest crediting: Policies may offer different options for growing your cash value, so the crediting rate depends on what you choose and how those options perform. A fixed segment earns interest at a specified rate, which may change over time with economic conditions. An indexed segment is linked to the performance of a market index, typically subject to both caps and floors.
Different strategies for different needs
Neither type of policy is necessarily better than the other - it all comes down to your goals and strategy.
Whole life policies may appeal to you if you prefer predictability. You know exactly how much you'll need to pay every year, and you can see how much cash value to expect in any given year.
IUL may be attractive if you need flexibility and you can afford the risk of having to pay more to keep the policy in force due to poor cash value growth.
When assessing life insurance needs, evaluate your long-term goals, your current and future expenses, and your desire for security. Discuss your goals with your agent, and choose the policy that works best for you.
*As long as required premium payments are timely made. Indexed Universal Life is not a security investment and is not an investment in the market.
All payments and all guarantees are subject to the claims paying ability of the insurer.
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