Each day we field questions about Whole Life in relation to Indexed Universal Life (IUL) products. These product types are not mutually exclusive — both product can be a valuable contributor to a client’s financial-asset portfolio.
UNDERSTANDING THE DIFFERENCES
The benefit of Whole Life is the certainty of policy guarantees: guaranteed cash-value accumulation, guaranteed death benefit and guaranteed premium level. Indexed Universal Life insurance policies are designed upon a universal life chassis; meaning most of the values in the policy are not predetermined.
The formulas to arrive at guarantees for Indexed Universal Life policies may vary among carriers. Some have a fixed guaranteed rate of interest, while some apply an average value methodology.
Understanding the assumptions on which the illustrations are based for both products is important. Whole Life illustrations assume current dividend scale for projections while Indexed Universal Life illustrations assume a return in the selected measuring index for projections. Since both use projected rates, we have to ask are projected rates of interest realistic and sustainable?
It is also important that clients and financial professionals understand the critical need to manage both products — particularly when distributions are taken from the policy —and to recognize the differences between both products. Perhaps the most prominent difference is that Indexed Universal Life products contain more moving parts when compared to a Whole Life policy. At the same time- Index UL offers more flexibility in plan design.
Cost is also a factor. While Whole Life has better guarantees those guarantees come at a cost. IUL has less guarantees and more flexibility, but typically the cost is lower than whole life for the same Death Benefit.
OTHER ITEMS TO CONSIDER:
- What is the client’s risk tolerance and years to retirement?
- How much money does the client currently have exposed to market risk?
- How much money does the client currently have in fixed-rate, conservative financial assets?
- Are guarantees and safety important to the client?
We are a firm believer in both Whole Life and IUL. Each situation needs to be looked at before a product can be recommended. Give us a call on your next case and we can design a plan for you.
Great article Jeff
What a great explanation and insight!