IUL vs. Whole Life Insurance: Key Differences Explained
IUL vs. Whole Life seems like it would be a simple comparison, but oftentimes you’re comparing apples to oranges.
What we’ve done below is categorize the various benefits of Whole Life and IUL so show which product has an advantage and where they are essentially equal. The rest of this article goes deeper into detail with these various categories.
Deciding whether Indexed Universal Life vs. Whole Life insurance is better suited for you may be one of the most complex financial decisions you ever make. Since both life insurance products should ideally endure your whole life, you’ll want to get balanced context so you can make an informed decision.
Do NOT just simply run an illustration horse race and trust these static assumptions will come true!
All illustrations are doomed to be wrong and don’t reveal what devils are in the details. Furthermore, you’ll want to consider the different areas of utility below that both Whole Life and IUL can help with throughout life’s different stages:
- Better holding tank for safe & liquid reserves (infinite banking)
- Retirement tax eraser & volatility sponge
- Wealth-replacement fund upon passing of the insured
- Protection hedges against death and chronic illness/injury all along the way
One of my early mentors once told me, “It doesn’t matter which benefits you like best, because you get them all!” However, depending on which benefits you do like best is often a good indicator of whether IUL or Whole Life insurance will be better suited for you.
Full disclosure: I personally own and sell both Whole Life and Indexed Universal Life as a card-carrying financial professional with loads of alphabet soup after my name. Truth be told, my preference between IUL vs. Whole Life has changed over the last 16 years, not once, but twice as product designs, regulations, and financial markets all went through drastic changes of late. Also, since I just turned 50 years old, I am more strongly considering the retirement applications of Whole Life insurance vs. IUL.
Structurally we’re dealing with two totally different insurance animals when it comes to Whole Life insurance vs. Indexed Universal Life in terms of the following categories:
You can click into any of these categories above or the table of contents below.
Table of Contents
Before we dig into the details, let’s discuss the basics of what exactly are Indexed Universal Life and Whole Life insurance as well as how they work.
Indexed Universal Life Insurance (IUL) Explained Simply
IUL is simply a traditional Universal Life policy only with some added growth options tied to stock market indexes rather than simply just a traditional fixed crediting option that behaves like an adjustable-rate bond.
Just like with IUL’s predecessor Universal Life, the insurance company deducts a dynamic cost of insurance from any premium contributions, and the remainder stays in the policy cash value to grow. Some of the growth goes to pay for future policy costs, while any surplus cash value can be used for tax-exempt distributions throughout the life of the policy.
Universal Life is known for maximum flexibility and Indexed Universal Life is no different. In addition to fully flexible premiums (as long as the internal costs are satisfied), most IUL policies offer additional flexibility with your cash value growth options. There are often multiple indexed crediting strategies to choose from that will ideally give you better long-term performance than the fixed account. However, you can re-allocate your selections every year as the insurance company adjusts their parameters.
The tradeoff for IUL’s flexibility is a lifelong responsibility to make sure you have paid enough premium and/or gotten enough indexed crediting to pay IUL’s costs all the way through life expectancy. On paper, with today’s assumptions, Indexed Universal Life should be a favorable lifelong vehicle, but remember that IUL’s parameters are flexible for both you and the insurance company.
To dig even deeper into IUL’s pros & cons you can check out our in-depth article.
Whole Life Insurance Explained Simply
On the surface, Whole Life Insurance sounds a lot like an old-school (non-indexed) Universal Life Policy since most Whole Life companies pay a bond-like crediting rate declared annually called the dividend interest rate.
(Note: There are certain Whole Life companies that do offer the ability to earn indexed crediting on your dividend payout, but this is simply an ancillary crediting option for these select companies).
However, only part of the Whole Life dividend is tied to prevailing rates in the company’s portfolio, and the rest comes from the overall profitability of the issuing insurance company. That’s because whenever you buy a Whole Life insurance policy from a mutual insurance company vs. a stock company, you actually become a small part-owner of that company, hence the term mutual.
Whole Life’s growth is unique in that in addition to its dividend component, there is an underlying guaranteed growth assumption of 2%-3.75% whether the company pays a dividend or not in any given year. In addition to its guaranteed growth, Whole Life also has a guaranteed level premium, a guaranteed death benefit, and a guaranteed cost structure.
Whole Life is often referred to as a “bundled product” or “actuarial black box” where the fees and growth assumptions are not transparent. That said, because of these contractual guarantees both Whole Life’s cost and growth parameters are locked in at the onset of the policy. In fact, the only lever that can be changed in Whole Life by the insurance company is the dividend interest rate we first spoke of.
Without further ado, let’s discuss how these 2 distinct variations of life insurance products work, where they shine, and where they fall short.
Whole Life vs. IUL in terms of Transparency and Guarantees
When it comes to guarantees this is where Whole Life dominates since it has a:
- Guaranteed Cost Structure
- Guaranteed Death Benefit
- Guaranteed Level Premium
- Guaranteed Cash Value Growth
The flipside of Whole Life’s guarantees is that it is a “bundled product” or a “black box”. This means Whole Life’s annual costs and growth rates are neither transparent nor easily discernable for clients or agents for that matter.
That said, we show how we essentially “unpack” and quantify Whole Life’s fees in our latest video course. You can sign up here for free and jump straight to the last video on the Cost/Benefit analysis of Whole Life’s early fees.
Conversely, Indexed Universal Life lacks these key guarantees and instead has maximum transparency. Each month’s costs and growth are unpacked down to the penny on IUL’s annual statement. I believe the main reason for this transparency is that it is ultimately the client’s responsibility to manage the balance of growth and cost to keep their IUL in force.
Indexed Universal Life does NOT have guaranteed growth, but it does have a guaranteed 0% floor protecting against any market losses. However, that does not mean IUL is principal-protected since its 0% floor doesn’t account for any annual fees or cost of insurance. That said, if your IUL is properly designed and managed the average annual cost over the life of the policy should be on par with professional money management.
Lastly, although this is not touted as one of IUL’s express guarantees since it doesn’t sound great, Indexed Universal Life’s cost per unit of death benefit is set to increase every year as the insured ages. Not only that, but IUL companies are allowed to adapt this cost structure further if they feel they originally mispriced the product. So, the cost structure is guaranteed to change, and the cost per unit of insurance is guaranteed to be higher. It’s up to you to balance this by achieving superior growth and/or trimming the death benefit as needed.
Hutch’s Take on Transparency vs. Guarantees with IUL & Whole Life:
Although the true transparency of IUL is nice to see, the bundled guarantees inside the black box of Whole Life are much more valuable and can be discerned to a reasonable level through modeling by a savvy insurance agent.
When people are younger these guarantees may not seem as important. Remember though that both Whole Life insurance and Indexed Universal Life are meant to last for your whole life.
- Without a guaranteed death benefit, you risk the policy lapsing which triggers immediate tax consequences if you took more income from the policy than you paid in.
- Without a guaranteed level premium, you may be forced to pay very high catch-up premiums near life expectancy to keep the policy in force.
- Without guaranteed cash value growth, you won’t have a true non-correlated source of retirement income to pull from when your investments are in a tailspin.
Later in the article we will elaborate further specifically on the importance of Whole Life’s guarantees in retirement.
For now though, I think it’s safe to say that Whole Life is the clear winner when it comes to guarantees despite where it lacks in transparency.
IUL vs. Whole Life with Flexible Premiums
Believe it or not, the lack of guarantees in IUL actually becomes an advantage over Whole Life in terms of flexibility.
Why?
With IUL there is technically never any premium due. There may be a suggested premium, or you may get a notice in the mail for whatever scheduled premium you originally committed to. However, this is essentially just a guideline. As long as your IUL policy has enough cash value to support the ongoing charges, your policy won’t lapse.
That’s why on every single IUL contract they call it your policy “Flexible Premium Adjustable Life” just like its original predecessor Universal Life. IUL premiums are indeed truly flexible, but the tradeoff for that flexibility is the fact that the insurance company can and will adjust the cost of insurance as you get older.
Unlike IUL, Whole Life has a guaranteed level premium supporting a guaranteed death benefit. Thankfully, a guaranteed portion of each premium will go towards your cash value and grow every year on a guaranteed basis. In order to maintain these guarantees in Whole Life, there is no flexibility in paying this guaranteed minimum premium each year unless you would borrow against existing cash value to do so.
With Whole Life you need to count on some minimum maintenance due every year to support that guaranteed premium. That said, the minimum premium due is usually around ¼ of the maximum possible premium you can pay. It could be more or less than ¼ of the maximum recommended premium depending on the exact product/company as well as your age/health.
That said, unlike IUL’s minimum premium which only pays the annual fees and therefore gets no growth, a good chunk of Whole Life’s minimum premium actually still builds cash value.
We have clients that have paid the absolute maximum into their Indexed Universal Life policy in year 1 and then skipped multiple years thereafter. Their cash value usually doesn’t perform great in these cases, but their IUL policies aren’t even close to lapsing by this point either.
Hutch's Take on Indexed Universal Life vs. Whole Life in terms of flexibility:
It’s undeniable that Indexed Universal Life vs. Whole Life is the winner when it comes to flexibility. However, if maximum cash value growth is your goal though, then flexibility probably should NOT be your main criteria for deciding between IUL vs. Whole Life.
Pro Tip: If cash value growth is your goal, then you need to pay premiums far greater than the minimum premium for robust cash value growth. That way the vast majority of your premium payments goes toward uninterrupted cash value compounding, while only a small fraction goes towards fees and insurance costs.
Flexibility for Whole Life vs. IUL should be thought of not as some kind of major benefit, but more of a contingency feature which allows for flexible funding in seasons when cash flow may be tight.
If premium flexibility is your main concern, then perhaps you should be considering a smaller size policy regardless of whether it’s Indexed Universal Life or Whole Life insurance.
IUL vs. Whole Life with More Growth Options & Market Particpation
Again, Indexed Universal Life takes the prize here over Whole Life when it comes to growth choices and some kind of market participation.
Practically any Indexed Universal Life will have an array of indexed crediting strategies whereas Whole Life Insurance often has no choices, just its guaranteed growth plus whatever dividends get credited to the policy each year. However, certain Whole Life companies do offer the option of simplified indexed crediting on your dividend payout.
Book your own custom call to fully understand your best Whole Life & IUL options.
Although Whole Life’s growth mechanism is relatively simple, it is completely unique in that it is totally non-correlated to the stock market, and only the non-guaranteed portion of its growth is correlated to interest rates. That said, the major difference between Whole Life and bonds is that bonds will go down when interest rates go up, whereas Whole Life cash value has to go up every year.
Another alleged advantage of Indexed Universal Life is its ability to participate in market gains in up years while maintaining a 0% floor in down years.
On paper, this sounds amazing! You hear some agents boasting about how it’s better than the stock market.
However, what I’ve found to be reality (as both an IUL agent and consumer) is that even though I’m hedged during the down years, I end up leaving A LOT of upside on the table in years where the market is roaring higher due to my IUL caps.
So, in actuality, IUL’s cap and floor model makes its long-term returns closer to bonds vs. stocks.
Even though Indexed Universal Life allows me to lock in most of my previous gains with the 0% floor, don’t forget that fees and any loan interest will erode some of these gains in down years. This makes IUL’s 0% floor a negative number actually, albeit a small negative number if the policy is designed and funded properly.
Yet the Tik-Tokers would have you believe that Indexed Universal Life will produce better returns than investing in stocks and mutual funds, which will almost always be false unless you happen to cherry-pick the absolute worst stock market timeframes.
Hutch’s Take on IUL vs. Whole Life with Growth Options & Participation:
When it comes to IUL vs. Whole Life for growth choices and market participation, Indexed Universal Life does indeed win. However, you have to ask yourself, “Are you perhaps striving to answer the wrong question correctly?”
Indexed Universal Life is not supposed to be a proxy for investing in the stock market, but at best to complement it. The only place where IUL should be a pure substitute for investing in the stock market, is when someone has zero exposure to equities due to their extreme fear of any volatility whatsoever. In this case, we feel that something like IUL is better than nothing for these most conservative clients.
If you already have sufficient exposure to the stock market through your 401(k) or ETFs, then IUL’s additional watered-down market exposure may not be as valuable as the true non-correlation of Whole Life insurance. This is especially true in how each can help in retirement like we discuss below.
Both Whole Life & Indexed Universal Life for Retirement
Remember at the beginning of this article we mentioned how Whole Life and IUL can add unique value in retirement? It doesn’t matter which of the benefits you like the best because you get them all!
Whether you’re a serial entrepreneur who’ll never fully retire, or just someone playing catchup, isn’t it safe to say at some point you’ll want to lessen your efforts and have your assets at work replace your efforts to some degree?
Even though at Banking Truths we’re primarily known for how to use Whole Life for infinite banking, the Indexed Universal Life vs. Whole Life argument has some very subtle but crucial distinctions when it comes to retirement planning.
Two unique ways that both Whole Life and Indexed Universal Life can help you when it comes to retirement planning are managing taxes and market volatility, both of which can inefficiently erode your other retirement savings.
Think about these 2 realities we will all have to grapple with in retirement:
- If tax rates go up with a stroke of a pen in Congress, you’ll have to liquidate more of your investments to support the same amount of lifestyle spending in retirement.
- If your investments go down in value due to market volatility, you’ll have to sell more shares to support the same lifestyle you’re used to.
Either way, those extra shares you had to sell won’t be able to rebound to help you in later years.
They’re gone!
And they really provided no additional value for you or your family. If all your eggs are in the same basket exposed to market volatility and bad tax policy, then you will have painted yourself into a corner in retirement.
What’s the alternative?
Using Whole Life or Indexed Universal Life as a volatility sponge & tax eraser. Take a look at this simple matrix I made for when to more heavily rely upon your life insurance in retirement.
Get the entire free report that goes in-depth into strategic tax planning in retirement using life insurance.
So, let’s discuss which is superior when it comes to IUL vs. Whole Life insurance in retirement for both market volatility and taxes, two of retirement’s main eroding factors 👇.
Afterward, there’s a 3rd retirement benefit that only Whole Life can offer. This hidden benefit is often overlooked in today’s traditional planning but was utilized extensively by our parents and grandparents to ensure a stable and impenetrable retirement.
IUL and Whole Life Insurance as a Tax Eraser in Retirement
Both Indexed Universal Life and Whole Life are equally immune to taxation as long as you keep even just a small amount of death benefit in force until the insured passes away.
Here’s why protection against taxes is so important…
Unlike market losses which typically last 1-3 years, couldn’t extremely unfriendly tax policies last for 8, 12, or even 16 years if certain political regimes dominate in Washington D.C.?
Aren’t there over 32,000,000,000,000 reasons (and growing) why taxes will likely have to rise throughout your retirement at some point?
If so, what if you could steadily and aggressively pull streams of cash flow from your IUL or Whole Life policy when your other taxable or tax-deferred retirement accounts could push you into the more penal tax brackets?
That way you have the capacity to ward off a decade or more worth of the highest tax brackets through a decade or more of bad tax policy, thereby conserving your taxable and tax-deferred retirement assets.
Hutch’s Take on IUL vs. Whole Life with Growth Options & Participation:
Since both product types offer you the same tax immunity, we’ll call it a draw when it comes to Indexed Universal Life vs. Whole Life for tax-exempt retirement income.
On paper using today’s assumptions Indexed Universal Life is set to outperform Whole Life insurance, but this assumption cannot be counted on due to IUL’s lack of guarantees and multiple variables that can be changed by the issuing insurance company.
Although a Roth IRA or Roth 401k may do the trick as a tax eraser, it likely won’t hold up as a volatility sponge since it’s also correlated to stock market fluctuations. Also, you cannot tap into your Roth IRA beyond your basis before age 59.5 without incurring penalties, whereas you can utilize up to 95% of your cash value at any time for any reason.
Whole Life vs. IUL as a “Volatility Sponge or “Actuarial Bond” in Retirement
Historically people would invest in balanced portfolios such as a 70/30 or 60/40 blend of stocks/bonds. The bond component was meant to lessen volatility in a portfolio. As you get older you ideally would ratchet down your potential volatility by exchanging stocks for bonds as you rebalance to ensure a smoother ride on the retirement roller coaster, so to speak.
The 2 major challenges facing bonds as a volatility sponge going forward are:
- Whenever interest rates rise, the principal value of existing bonds goes down! (Which way are interest rates likely trending long term?)
- Bonds aren’t as safe as they used to be, as evidenced by their precipitous drop in value in 2022 shown in this scatterplot by Deutsche Bank:
For these reasons and the fact that most folks approaching retirement feel they are playing catchup, we often find them overexposed to massive swings of volatility by being allocated to 90-100% stocks with little to no exposure to bonds. Retirees may acquire a mathematical advantage by allocating some of their retirement assets to actuarial bonds from insurance companies.
By having a true non-correlated source of retirement income from an “actuarial bond” like Whole Life, retirees would be able to temporarily pause income from their 401(k) or brokerage accounts while they healed, thereby preserving more shares for future market rebounds.
Keep in mind that Indexed Universal Life is still somewhat correlated to market movements with a 0% floor less any fees. However, temporarily taking income from IUL while pausing your portfolio would be better than having no volatility sponge at all.
See Tom Wall Ph.D.’s study from his book Permission To Spend on the range of viable withdrawal rates on the same portfolio depending on what year you started and how many years of a “volatility sponge” (he calls it a “buffer asset”).
Although the study above has the benefit of hindsight, clearly retirees would’ve been able to enjoy higher withdrawal rates from their 401(k) and brokerage accounts with the existence of any amount of volatility sponge in place before retirement.
With Whole Life insurance, you can withdraw up to your basis (how much premium you paid) without incurring one penny of fees or loan interest in retirement. And you can do so without compromising the integrity of Whole Life’s guaranteed growth or death benefit giving you the confidence that the product will indeed be there for your Whole Life.
Multiple years’ worth of aggressive income distributions from an IUL product (whether withdrawal or loan) will cause more fees to add up plus any accruing loan interest from prior distributions. This may reduce the ultimate capacity of Indexed Universal Life to act as your volatility sponge when you arguably need it the most even if IUL outperformed Whole Life during pre-retirement years.
Hutch’s Take on Whole Life or IUL as a Volatility Sponge in Retirement:
The edge here definitely goes to Whole Life insurance over Indexed Universal Life in terms of a volatility sponge in retirement due to its true lack of correlation and overall guaranteed integrity every single year regardless of external market forces.
Since people often keep cash before and during retirement, consider redeploying some of these funds to one of these “actuarial bonds” offered by insurance companies. Cash value life insurance when properly designed historically provides superior tax-adjusted returns long-term for its similar risk profile to cash while also providing additional benefits.
Even if the interest rate of cash or CDs exactly matched that of Whole Life and IUL (which it hasn’t over time), the taxable nature of these traditional banking products put a natural drag on their performance. Not to mention, high-yield savings or CDs can’t possibly offer this hidden retirement benefit discussed directly below.
Whole Life vs IUL for Wealth-Refiller Upon Death
Once people see the value of Whole Life or IUL in retirement they often plan on using only the cash value as this strategic income replacement when markets are down or taxes are up. The death benefit in their mind is seen as purely an ancillary benefit.
I’ll bet you still catch yourself saying things like:
- “I don’t really care about the death benefit.”
- Or, “The death benefit is secondary to me.”
- Or, “My primary goal is cash value growth & income.”
If you’re saying any of these things, then you may be overlooking one of the best strategies in retirement planning.
What you’re missing is the fact that the guaranteed death benefit of specifically Whole Life is one of the most powerful and forgotten tools for retirement distributions. Unfortunately, Indexed Universal Life won’t cut it because there’s no way to guarantee the death benefit without losing your access to the cash value.
What if I told you that there was some “selfish value” within your own death benefit you could monetize while still keeping full control of your policy?
What if you effectively become the primary beneficiary of your own death benefit while you’re still alive?
If you want to take your retirement withdrawal strategy to the next level, you must consider how the death benefit specifically from Whole Life (not IUL) can act as a unique wealth-refiller asset. ⚰💸🤑👇.
Let me explain the concept with a simple analogy before digging into the details of Whole Life vs. Indexed Universal Life for this special death benefit strategy:
Imagine you had a very rich uncle, and he really loved your spouse and children. In fact, imagine he loved them so much he said to you, “Hey, I’ve put aside $1,000,000 in trust just for them, and they can start drawing from it right after you pass away.”
At first, you may be miffed that your rich uncle didn’t include you personally in this family trust fund. However, he actually did you a major favor. Let me explain…
Since you know your family has a guaranteed accounts-receivable of $1,000,000 that comes in at the time of your death, can’t you more aggressively spend at least $ 1 million of your own retirement assets rather than keep that money intact for heirs?
Said another way, without this trust from your uncle, you would have to be extremely conservative about how you manage and spend your own $1m nest egg. You’ll have to sparingly tap into these funds to make sure your assets endure for both you and your spouse in addition to whatever you want to pass down to children.
You will have painted yourself into a corner of scarcity, scraping only the bare minimum from your retirement accounts each year, not even knowing how long they even need to last! Couldn’t you more freely enjoy your wealth in abundance if you had a rich uncle promising your family such a bequest right at the time of your passing?
Guess what… even if you don’t have a rich uncle, couldn’t you manufacture one using Whole Life insurance to replace the consumed assets?
By having the guaranteed replacement of that $1m, you could violate the infamous 4% rule and instead take 6.8%-7.8% currently and guarantee you’ll never outlive the income. (This math is as of 8/14/2023 and assumes a male starts retirement at age 65 using a Fixed Indexed Annuity or Single Premium Immediate Annuity.)
What’s even better is that since Whole Life’s death benefit is guaranteed, you could take any excess dividends in cash as that tax-exempt supplement or roll them back into the policy to buy even more paid-up additional death benefit depending on which is more important to you each year.
Wait! What about using IUL vs. Whole Life insurance as the rich uncle fund?
Nope, you can’t because Indexed Universal Life does NOT have a guaranteed death benefit, unlike Whole Life. Also, to make IUL perform well from a cash value standpoint, you should always maintain as little death benefit as possible. Otherwise, IUL’s fees can increase exponentially on you in retirement, which will obviously both erode the cash value and remaining death benefit.
Without a guaranteed death benefit to replenish these consumed retirement assets, you’ll almost certainly have to do one of two things instead:
- Scrimp and save taking meager income streams throughout retirement
- Or consume your assets anyway, putting undue pressure on your surviving spouse when they’re least equipped to handle it
It doesn’t have to be that way!
Hutch’s Take on Whole Life vs. IUL as a Replacement Asset After Retirement:
This one is not even close! Whole Life’s guaranteed death benefit is simply the only one that works here.
If you are committed to building a volatility sponge and tax-eraser now anyway, Whole Life will automatically build up a certain amount of guaranteed death benefit through your base premium and paid-up additions. This forgotten net death benefit (over and above your cash value) can measured an monetized in addition to Whole Life’s cash value to buffer against taxes and market losses.
Lock in some amount of guaranteed death benefit now using whatever portion of your savings you want to keep safe & liquid anyway. Remember, it doesn’t matter which parts of Whole Life you like best – you get them all!
Since we’re on the topic of guaranteed death benefit, let’s get into another unique dimension of utility it has providing selfish benefits for the insured policyholder 👇.
IUL vs. Whole Life for Protection Against Death and Chronic Illness/Injury
Nobody likes to imagine themselves too sick or hurt to function on their own in society. Everyone thinks it can’t happen to them, however, bad things do happen to good people. A traditional Long-Term-Care policy can be extremely expensive, and those premiums would be a pure cost since they never build any cash value equity you can use along the way.
However, a hybrid life insurance policy with chronic/critical illness/injury provisions allows the user to hedge against this serious risk while simultaneously building up cash value and death benefit they can use for retirement.
I’ve heard countless tear-jerking stories over the years about clients who bought these types of hybrid life policies only to end up coming down with some kind of horrible illness. Having this benefit allowed them to:
- Alleviate financial stress that could’ve accelerated their condition
- Afford quality care they couldn’t have otherwise paid out of pocket for
- Paid for travel & lodging expenses for extended family to be with them
Who wouldn’t want this kind of hedge in their back pocket?
So, when it comes to Indexed Universal Life vs. Whole Life for these types of chronic illness riders, which is better?
That’s a trick question because some of these riders are free and the more robust ones are paid riders that incur additional charges which erode cash value significantly.
That said, I’ll give the edge here to Indexed Universal Life over Whole Life for the chronic illness category because there seems to be a greater selection of benefits in Indexed Universal Life policies vs. Whole Life insurance on this front.
Also, when it comes to a free version of these chronic illness/injury riders, it seems like almost every IUL company has them, whereas only certain Whole Life companies offer a free chronic illness rider.
Keep in mind though that similar to the “wealth-refiller” topic above the chronic illness riders are attached to the death benefit. So, unless the IUL has some sort of guaranteed death benefit rider, it is not guaranteed to be there when you may need it the most unlike with a Whole Life policy.
Hutch’s Take on Indexed Universal Life vs. Whole Life with Chronic Illness Riders:
This one is tricky!
Even though a slight edge goes to Indexed Universal Life for the fact that nearly every IUL policy has some sort of free chronic illness provision, you can’t really count on it being there once you start using the cash value for other retirement needs.
Very few Whole Life policies have the free provision, but if you do get this free provision on a Whole Life policy at least it is tied to a guaranteed death benefit. At least then you know it will be there no matter what.
If hybrid long-term care protection is your main reason for getting a policy, then consider most of this article irrelevant to you. There are certain hybrid life policies (both IUL and Whole Life) with very robust riders specifically for Long Term Care that will be better suited to address your concerns than products designed for cash value usage.
Whole Life vs. Indexed Universal Life as your own bank
We realize there’s a lot of hype and misinformation on the internet around the infinite banking concept. We named our site Banking Truths because our mission is to provide thorough, factual, and educational info about how and why infinite banking works.
This is because it’s one of the most powerful ways to deploy your safe & liquid reserves in between life’s various opportunities & emergencies. Doing so long before retirement can help you build the ultimate financial instrument that can help you with all the retirement considerations discussed above not to mention all along the way during your working years.
But you may be wondering, is Whole Life or Indexed Universal Life insurance better when practicing the infinite banking concept?
Many die-hard infinite banking practitioners swear that only Whole Life can work. Even though we agree that Whole Life has clear advantages over Indexed Universal Life with IBC, we can empirically say that IUL has what it takes to function for infinite banking as long as it is designed, funded, and managed well throughout the life of the policy.
Why Whole Life Insurance vs. IUL for Infinite Banking?
Whole Life’s cash value is guaranteed to grow each & every year no matter what.
This is especially important because most people will likely want to take advantage of outside investment opportunities when “the sky is falling” with stocks and housing markets. Whole Life cash value contractually keeps growing regardless of external economic conditions. This awesome phenomenon not only gives you more borrowing power during these periods, but also less maintenance over the following years since your collateral keeps growing to offset unpaid loan interest.
Ability to get outside line of credit programs for up to 95% Loan to Value on a turnkey basis with Whole Life whereas IUL you cannot.
Although both Whole Life and Indexed Universal Life have contractually embedded loan options, Whole Life historically has been able get more attractive rates from outside lenders. Since banks can create loans out of thin air, they obviously respond quicker to interest rate fluctuations than insurance companies do.
When rates fall, there have been massive arbitrage opportunities using these turnkey lending programs. However, the recent rate spikes have made them currently unattractive, but stay tuned since rate changes are likely to stay noisy for some time.
When using the highest quality Whole Life companies, most Whole Life policyholders with over a 650-credit score will have access to these programs even though they don’t stay on your credit report.
The reason why these turnkey lending programs exist for Whole Life is because it is considered a cash-secured loan where the collateral has guaranteed growth backed by some of the highest rated financial companies in America.
The iron-clad guarantees of Whole Life backed by rock-solid ratings allow the bank to more thinly collateralize these types of loans giving you access to a 95% loan to value line of credit! That ought to tell you something about the quality of the strength of both the product and the mutual companies selling Whole Life. What other assets will banks lend you 95% LTV besides cash or CDs?
Why Indexed Universal Life vs. Whole Life for Infinite Banking?
IUL has the “potential” to earn higher growth rates through indexing.
This is a slippery slope, and I almost didn’t want to add this because it sounds better in theory than what has actually occurred in reality. Yes, over time IUL illustrations project to beat Whole Life since its growth is tied to an external market index. But remember, this gets balanced out by 0% years when the index is flat, which translates to slight negatives from fees plus any accruing loan interest. Generally, IUL illustrations don’t show any 0% years.
Although a 9.5% cap may still sound appealing remember that insurance companies retain the right to change this annually as they see fit to adapt to prevailing market conditions.
Also, lately we’ve seen IUL caps and participation rates sliding down to single digit rates as interest rates fell. Even though interest rates are rising now, we have not seen a proportionate lift in IUL caps. This is mainly because of higher overall market volatility, which increases the cost of the option hedging strategies.
That said, IUL does have higher growth potential if you catch a favorable bull run when the growth is more evenly spread out amongst several different years. However, if the bull run is concentrated amongst a few spikey years, it’s likely IUL’s caps and participation rates won’t allow you to capture the bulk of the move.
IUL’s have multiple embedded loan options.
Although IUL doesn’t qualify for the turnkey line of credit programs, most Indexed Universal Life policies have multiple loan options embedded into the policy itself. There’s always a fixed loan option as a failsafe for policyholders since it has no positive arbitrage opportunities. A fixed loan often credits you exactly what the loan interest is from the 11th policy year onward, and usually a -1% arbitrage situation for the first 10 years.
However, IUL usually offers some sort of participating loan where your cash value stays invested in certain index crediting strategies. This gives policyholders the “potential” for positive arbitrage in years where the cash value grows more than the loan rate. During retirement though, multiple 0% in a row coupled with IUL’s increasing fee structure may cause notable erosion to cash value you were counting on as a volatility sponge or tax eraser.
Hutch’s Take on Whole Life vs. IUL for Infinite Banking:
So which product has the advantage when it comes to Whole Life vs. Indexed Universal Life for infinite banking and parking your safe and liquid reserves?
- We find that most real estate investors and business owners using life insurance as their own private bank prefer the stability of Whole Life even if they don’t have quite as much upside potential. Think about it, doesn’t the bulk of your alpha come from your strategic and timely investment opportunities rather than the growth rate of your liquidity?
- Yes, you want to outpace inflation in between opportunities, but we would argue that stability during turbulent times is more important, not to mention clients are often overexposed to the stock market movements with their other assets.
For these reasons, we give the advantage here to Whole Life vs. Indexed Universal Life when using the infinite banking concept.
Final Thoughts on Whole Life vs. Indexed Universal Life:
There really is no one-size-fits-all right or wrong answer. It all comes down to your particular preferences, risk tolerance, how you plan to use the policy, and when you’ll likely use it the most. Both Indexed Universal Life and Whole Life can help immensely during retirement and before as well.
If long-term retirement applications are your main goal, we strongly suggest you read our write-up on how each Indexed Universal Life and Whole Life help retirement. There is definitely some overlap as well as some clear differences.
Book Your Custom and Confidential Consultation
John “Hutch” Hutchinson is the founder of BankingTruths.com, an educational site discussing how to maximize the lifetime benefits of both Whole Life Insurance and Indexed Universal Life Insurance by creating your own private family banking mechanism.
Information presented in this article by John “Hutch” Hutchinson is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, insurance products, financial services, or investment strategies. Be sure to first consult with a knowledgeable, ethical, and licensed insurance professional before implementing any strategy or product discussed herein.