Whole Life Insurance vs Indexed Universal Life Insurance

life insurance

You have maxed out your 401 (k). You earn too much income to qualify for a Roth, or maybe your Roth is maxed out too.

You’re looking for decent earnings, no stock market risk, and tax-free money for retirement.

What are you doing?

Take a look at permanent life insurance for a great retirement savings option.

Types of permanent life insurance are:

  • Whole Life
  • Insurance Indexed Universal Life Insurance (IUL)

A whole life insurance policy leads the two with 35% of life insurance sales and IUL traces at 24%.

However, in 2018, IUL sales grew to record levels as consumers sought protection against stock market instability.

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WHY CHOOSE A PERMANENT LIFE INSURANCE POLICY IN THE FIRST PLACE?

Permanent life insurance offers several advantages over term life insurance.

But, term life insurance is the least expensive type of life insurance . The terms are from 10 to 40 years for the most part.

Permanent life insurance provides protection for life. At some point, you know that the money will be transferred to your heirs.

Permanent life insurance has several other uses / benefits in addition to the death benefit:

  • Estate planning
  • Life benefits
    • This means money to use while you are still living to offset the cost of other expenses, such as long-term care or a serious health problem that may not be immediately life-threatening.
  • Supplemental Retirement Income
  • Tax haven
  • Protection against stock market risk
  • University financing
  • Personal or small business loans

HOW DOES WHOLE LIFE INSURANCE WORK?

Whole life insurance is just one of the many types of permanent policies in the life insurance industry. It was the original life insurance before the industry looked for ways to create variety and choice.

Simply put, a whole life insurance policy provides a death benefit and an accumulation of cash value.

You can set a limit on the maturity of the life insurance policy (usually 121 years) that goes well beyond the life of most people.

The insurance company will pay the death benefit each time the insured person dies.

As long as you pay the premiums, it won’t expire like term insurance.

CAN YOU EARN MONEY ON YOUR WHOLE LIFE INSURANCE CONTRACT?

The policy accumulates cash based on the dividends declared by the insurance company.

Many companies have more than 100 years of experience in paying dividends. Although the history of dividend payments is long; They are not guaranteed.

Whole life insurance policies return 3-5% on average.

These life insurance policies can include guaranteed growth or death benefits.

However, these guarantees come at a cost; Whole life insurance is usually more expensive than an IUL.

HOW DOES INDEXED UNIVERSAL LIFE INSURANCE WORK?

An agent who understands how to use IULs will structure your policy almost the opposite of term life insurance.

For term policies, you want to get the highest possible death benefit for the fewest premiums.

When you want to build correctly indexed universal life insurance , you want the highest premiums for the lowest death benefit.

Wait. That?

Yes, that is correct. The IRS limits how much you can contribute to your life insurance policy based on the amount of the death benefit.

The IRS limits contributions because they are exceptionally generous with tax treatment.

However, this is not a problem.

Want to save more money on an IUL?

Increase the life insurance death benefit, and the contribution limit increases along with it.

HOW DOES THE MONEY GROW IN AN IUL?

One big difference between an IUL and a whole life insurance policy is the way the interest is credited to the policy.

As mentioned above, whole life insurance policies earn when dividends are declared by the insurance company.

The interest credited to an IUL is based on an index, and the most popular index is the S&P 500.

Let’s say your IUL is using the S&P index to credit interest.

This does not mean that your money is in the S&P, but rather that the life insurance company uses it as an indicator of how much interest to credit your policy.

Receive the same performance as the S&P, but with 2 significant differences:

  • If the S&P index is positive for the year, you will receive the same return, up to a limit. If the limit is 11% and the S&P returns 13%; You receive the limit (or 11%) on your policy.
  • If the S&P index is negative for the year, you will receive 0%. In years like 2008, when the S&P is negative 37%, you would receive 0% on your policy. We say, “0 is your hero” because it protects your principal in a declining market.

Although your earnings may be limited, protecting your downside is even more critical.

WARREN BUFFETT ONLY TWO RULES TO INVEST …

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1 – Warren Buffett

Each insurance company offers different rates to choose from. Some indices are unlimited.

All companies offer a 0% floor to protect their capital in a volatile market.

IULs outperform whole life insurance on average. Some years could be 0%, and some could be 15%.

Returns the average between 5-9% over time in an IUL.

BENEFITS AND LIMITATIONS OF EACH KIND

Now, there is no definitive answer as to which is better: whole life insurance or indexed universal life insurance. It will depend on your long-term goals and other assets in your portfolio.

However, it is always best to work with an insurance or financial savvy expert to help you plan for the future, because they can help you identify whether or not it is a good decision for you.

But for the most part, there are certain advantages and disadvantages, regardless of who you work with or what life insurance for parents policy you take out.

PROS OF WHOLE LIFE INSURANCE

Whole life insurance is a simpler product to understand. There are fewer components and options to customize.

Whole life insurance also has stable premiums.

When you buy a whole life insurance policy/ Life insurance for couples, what you pay today will be the same as what you pay in 15 years.

You can set it and forget it (although it’s smart to review your life insurance annually).

Whole life insurance has more guarantees than an IUL, but these guarantees come at a cost.

CONS OF WHOLE LIFE INSURANCE

The accumulation of cash value of the whole life insurance policy grows much more slowly.

The rate of return is relatively stable, although it is not guaranteed. It can take several years to build cash value.

The higher guarantees on a whole life insurance policy equate to higher rates.

INDEXED UNIVERSAL LIFE INSURANCE PROS

The universal life insurance indexed has a higher rate of return.

This gives you the ability to do more with it, like skip premium payments or apply for a loan with no questions asked.

Indexed universal life insurance policies also offer more flexibility.

You can adjust your premium payments after you take out the policy. So no matter what happens in life, you can work with your agent to make sure your life insurance is always current.

The cost within an IUL is generally lower than a whole life insurance policy.

Properly configured and funded, your IUL can reduce the risk of surviving your money in retirement. This could be the biggest advantage of all.

We never know what kind of costs the future will bring or how long we will live. The life insurance policy will provide longevity insurance or insurance against living too long.

UNIVERSAL INDEXED LIFE INSURANCE CONS

An indexed universal life insurance policy requires an experienced agent to customize them. This is not a one-size-fits-all product.

An indexed universal life policy that isn’t carefully tailored to your needs can end up costing you more money than it’s worth and not working as expected.

The two main problems affecting IUL are generally due to:

  1. The agent who does not design the life insurance policy for maximum financing, or
  2. The insured does not pay the planned premiums.

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