Permanent life insurance is often overlooked when it comes to financial planning. Typical financial planning says, “buy term and invest the difference.” Few people actually understand the long-term benefits that a permanent whole life insurance policy can give them. The major advantages include tax-free death benefits and annual dividends. However, not all permanent life insurance policies produce the same financial results. 

Indexed Universal Life (IUL) insurance policies are often sold by insurance agents without proper instruction and client understanding. Some insurance companies prefer to sell IUL policies because it legally transfers some of the risk back to the client. This is contradictory to the purpose of an insurance company which is to mitigate risk. At McFie Insurance, we do not recommend IUL policies because of their high risk and low guaranteed benefits. In this article, we are going to break down the difference between Indexed Universal Life (IUL) vs Whole Life Insurance Policies.

What Is Indexed Universal Life (IUL) Insurance? 

Indexed Universal Life Insurance, as all universal life insurance products, such as variable universal life insurance, is built upon term life insurance for the coverage they provide. This means that, like all term life insurance policies, the cost of the coverage will go up over time.  But it is because of this term coverage that all universal life insurance, including IUL policies, have a flexible premium associated with them.

This flexibility is possible only because the insurance company charges more for the coverage provided than what they would charge for the same coverage if term insurance was purchased.  This extra premium paid goes into an accumulated cash value account.  And it is from this accumulated cash value account that your premium is actually paid every year.

Three main things to understand about IUL policies:

1. The return assumed in an IUL policy is not the return that your cash value increases by. There are fees to cope with in an IUL policy that can conceivably eat up more than your annual gains in a weak market.
2. The cap on your IUL returns can knock out forty percent or more of the earnings you could have experienced if you had simply invested directly in the Index of your choice.
3. When the market actually does go through a corrective period of time (which typically happens every eight-ten years), an IUL insurance policy also forfeits the growth that a dividend paying whole life insurance policy would continue to provide.

This means that about the time you need to draw from your life insurance policy to offset the income distributions that you can’t take from your investment without destroying your principle, your life insurance policy is no longer adding the value (this is due to the ever-increasing cost of the term insurance which is part of any IUL contract).

What Is Participating Whole Life Insurance?

Participating Whole Life Insurance (PWLI) is a contract that remains in force for the insured’s whole life and typically requires premiums to be paid every year. The contract is between the policy owner and the insurance company where the insurance company contractually guarantees to pay to the beneficiaries of the contract a certain death benefit upon the death of the insured; and to share with policy owners (participants, policy holders) the excess profits the company generates. This sharing of excess profits is referred to as dividends but is considered a refund of premium according to current tax law in the United States. Therefore, these dividends are not currently treated as taxable income in most cases.

Three main things to understand about Participating Whole Life policies: 

1. Participating Whole Life Insurance is based on guarantees backed up by the insurance company, not market speculation or indexes. 
2. As an owner of a Participating Whole Life Policy, with a Mutual Life Insurance Company, you get to share in the profits of the company. Dividends.
3. Participating Whole Life Insurance is based on your whole life, not just a term like an IUL policy.

Here’s an example of what could happen if you fund a Whole Life Policy vs Indexed Universal Life Policy with $3,010 per year for 40 years:

Participating Whole Life Policy 

Compare this to purchasing a Participating Whole Life Policy for the same premium. At age 66 your cash value is: $222,260 with whole life vs a universal life policy at a cash value of zero.  With dividends earned, your accessible cash values could be more than double of what is projected in the IUL and of course the dividends paid on the Participating Whole Life Policy can be used to offset the interest on the $40,000 policy loans you take to live on during a market downturn.

In addition, the Participating Whole Life Policy won’t lapse like the IUL policy  because there are no premiums required after age 66. This means that the guaranteed cash values keep accumulating along with any dividend payments.

Indexed Universal Life Policy

At age 66 you need to pull $40,000 annually from your policy because of a market correction that has just occurred and you don’t want to down draw the principle you’ve saved outside of your policy.

If your policy is an IUL and growth took place as illustrated using the maximum allowable rate over the past 40 years, then you have NO GUARANTEES that there will be any money to use from your policy! Even though you have paid in $117,000.

The non-guaranteed returns illustrated means you might have $126,00 of accumulated cash value to draw from at age 66. But, at $40,000 a year, you will run out of money in the policy in just a little over 3 years.  After that, your policy will lapse and you will have no insurance coverage on your life.

Things to remember about whole life vs indexed universal life:

• Owning an IUL policy means that you are assuming more of the risk.
• Owning a Participating Whole Life Policy, that risk is assumed by the insurance company.
• Not all permanent policies sold today guarantee that you will have coverage until the day you die.  ONLY Whole Life Policies  guarantee that: If you pay your premiums and any interest due on  policy loans you have outstanding against your life insurance, then your coverage will last your entire lifetime.

It helps to consider the risks and benefits when choosing between whole life vs. IUL policies. At McFie Insurance, we recommend a whole life insurance policy over an IUL policy because of whole life insurance’s long-term coverage and cash value benefits. Whole life insurance is the best way to keep more of the money you make, grow your wealth safely and have financial peace of mind.

To get a whole life insurance policy crafted for you, schedule an appointment with us.

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by Jesse McFie

I have worked hard and saved from an early age. In 2018, my brother and I started our own welding and fabrication business and grew it to a full-time company. As taxes, fees and inflation ate away at my hard-earned income and savings, I quickly realized that the financial system in America is not designed to help you get ahead. Using participating whole life insurance and the principles we teach at McFie Insurance has helped me get ahead financially. I’ve used my life insurance policies to expand our business, debt free, to purchase equipment, and save for a piece of property. I love sharing with others how they can do the same.