IUL or Buy Term and Invest the Difference?
Updated September 2026 · by John “Hutch” Hutchinson, ChFC®, CLU®, AEP®
This case study revisits the age-old argument of whether to buy term and invest the difference or to bundle both into IUL for a 61-year old business owner.
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The two policies, side by side
What the term policy actually buys
Where the 6.35% projection comes from
Term’s real rate of return
Buy term and invest the difference is one of the oldest arguments in this business, and most of the time it gets settled with a slogan instead of numbers. So let’s come at it from a different angle: one real case, run both ways, on one specific person.
The Two Policies, Side By Side
The policy here is on a 61-year-old business owner in standard health. His premium for a $500,000 10-year level term policy is $3,445 a year. The same $500,000 of death benefit put into a max-funded IUL, funded for six years, runs $40,000 a year.
After six years he would have paid $240,000 into the IUL, with no further premiums due, as opposed to about $20,000 into the term policy at that same point. And at the end of the full 10 years of term, he would have spent a total of $34,450.
Most people look at that and say, “Why in the world would I pay all this money to an insurance company when I can only pay them this and I can get a better rate of return elsewhere?” Maybe so, maybe not. That’s what the rest of this case study is for.
What the Term Policy Actually Buys
Take the term policy on its own first. At the end of 10 years he has paid $34,450, and the $500,000 of death benefit is supposed to go away when the level period ends.
It doesn’t have to, and some of you have run into this already if you’ve ever tried to keep a term policy going past its level period. In this case he could continue coverage for the low, low price of roughly $48,000 in premium for one more year of term — a year of coverage that builds no surrender value and produces no income. Most people have no intention of ever doing that. Occasionally circumstances change and it turns out to be worth it anyway.
What the IUL Does Year By Year
Now the IUL. He pays $40,000 of premium in the first year, and the death benefit climbs rather than staying flat, because this is an increasing death benefit design — it goes up by the amount of policy value, the money inside the policy growing for the client. That is a different number from surrender value, which is what the client can actually get his hands on.
This particular policy also uses an enhanced cash value rider. So in year one he has paid $40,000 of premium and could surrender the policy for $36,815. Run the other side of the argument on the same year: buy the term policy and bank the difference, and you’ve set aside the $40,000 less the term premium — which leaves $36,555 in the savings account.
Could he have gotten a better rate of return elsewhere? Possibly. Hold that thought, because it depends entirely on where this money was going to live otherwise.
Carry it forward and the surrender value tracks the cumulative premium closely. By the end of the sixth year, with $240,000 of premium in, he has $240,000 of surrender value — and more than that in policy value, since the death benefit grows by whatever is inside. There’s roughly $250,000 to almost $253,000 of money in there earning interest for him.
From there no further premiums go in, the death benefit flatlines, and the surrender value starts to converge on it. This business owner told me he wanted to sell the business somewhere between year seven and year 10, so he didn’t mind that his net coverage shrank over that stretch.
At the end of the tenth year — the same point where the term death benefit would have disappeared unless he paid that crazy premium — we manually reduced the death benefit to optimize the policy for income, simulating a business that has been sold by then and an owner who wants to start pulling tax-exempt income out. Moving from year 10 into year 11, the policy shows $20,000 a year of tax-exempt income.
Where That Money Was Already Sitting
Before comparing rates of return, I asked this business owner one question: “For your working capital — for buying trucks, for floating payroll in between receivables coming in — do you invest that money into mutual funds, stocks or bonds, or do you keep it in cash?”
What do you think he told me? He keeps it in cash. And he had a decent amount of cash and cash flow just languishing in bank accounts.
So what we talked about was not investing versus insurance. It was this: you could buy term, but you may want to consider an IUL for that idle money, because it has a zero percent floor, so you’re protected against market risk — and with the enhanced cash value rider you still have access to a good amount of it.
Where the 6.35% Projection Comes From
Everything above is built on a projection of 6.35%. That’s the assumed average crediting rate for this IUL, and it’s worth knowing where a number like that comes from rather than taking it on faith.
The insurance industry regulates what carriers and agents are allowed to show, through something called AG-49, or Actuarial Guideline 49. What AG-49 says is that you take an indexed policy’s own growth parameters — its floor, its cap, and which index it tracks — and look back 65 years to see how the policy would have performed in a back-tested environment.
And it isn’t a straight average of those 65 years. They take every 25-year rolling slice of that 65-year history and average all of those together to arrive at the AG-49 rate.
The 6.35% used here is a full percent below this policy’s AG-49 rate. I ran it at the AG-49 rate as well — 7.35% — and the surrender value is a little higher all along, roughly $9,000 further ahead by the end of the sixth year. At that rate the policy supports more income too: $29,000 a year instead of $20,000, and we ran it all the way to age 90.
Term’s Real Rate of Return
Some people look at those income numbers and say, “Maybe the net IRR — the internal rate of return, which is a different thing from the crediting rate — isn’t the best I could get.” That’s exactly what this business owner said to me. He said, “I’m just thinking of the cash flows here. If I put $240,000 in and I take all this income, could I get a better rate of return elsewhere?”
And I had to remind him: “Yes, maybe you can. But can you, given the same risk profile? Are you ready to take that working capital, the money you like to keep in cash in case you have to loan it to the company, and put it at risk?” He clearly stated no.
As a risk-adjusted rate of return it’s actually quite compelling. Line up three columns — the term policy, the IUL at 6.35%, and the same IUL at 7.35% — and here’s the part most people get wrong. On term, your outlay is a lot less, but your internal rate of return is negative one hundred.
When I ask what your rate of return is if you pay into a term policy for 10 years and get no money back, almost everyone tells me zero. It’s not zero. Zero would be getting all of your money back. In this case you get nothing back from the insurance company unless you die early, so your rate of return is negative one hundred.
If you want the best rate of return out of a term policy, just die early. It gets really, really good. But most of my clients don’t want to sign up for that program — and that’s why IUL can be a good alternative here. During the funding period the return is almost the same as putting the money into a savings account and deducting the term premium from it. If the crediting is decent it can be better. And once the premiums stop and the money keeps growing, that’s not a bad return for something where you’re taking no market risk and it stays fully accessible for the trucks, the equipment, the payroll, or whatever else comes up.
Add the Death Benefit Back Into the Math
Once you start taking income, the return on surrender value accounts for how much you put in, how much you’re taking out for income, and the total return on what’s left in the policy still to be taken out. It’s not bad at 6.35%, and it’s better at 7.35%.
But I have to remind clients that they’re probably not going to leave the undertaker with the bill. They’re not going to completely cannibalize the policy — they’ll leave some sort of death benefit behind for heirs, even if they pull a lot of income out, and that has to be factored into the equation.
So take the total return of not only the income you took out but the death benefit left behind as well. Now, all of a sudden, whether you get 6.35% or 7.35%, it’s really pretty good — especially once you consider that when you leave any amount of death benefit behind, everything is tax-free.
All the income is forgiven, whether it came out as a loan or as withdrawals. The basis and the death benefit are tax-free too. And when you take into account that none of this money is taxed, you didn’t take any risk, and you had full accessibility and liquidity throughout the process, clients all of a sudden find that this is a pretty attractive rate of return.
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BankingTruths.com is John “Hutch” Hutchinson’s independent education and brokerage platform, not a captive agency tied to one carrier. Educational only. Indexed Universal Life policies involve fees, caps, participation rates, spreads, policy charges, and loan risk. Index credits are not guaranteed. Policy loans and withdrawals may reduce cash value and death benefit, may cause the policy to lapse, and may create taxable income if not managed properly. This analysis represents the author’s professional opinion based on 19 years of experience and should not be considered tailored financial advice for your personal situation. Consult your tax, legal, and financial professionals before implementing any strategy.