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What is the difference between Whole Life and Indexed Universal Life for Retirement


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I get asked a lot about how Whole Life insurance differs from Indexed Universal Life insurance, particularly when it comes to retirement planning. In this presentation, I note the similarities between these forms of permanent insurance, the differences, and why you might use one instead of the other.

Published in: Economy & Finance
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What is the difference between Whole Life and Indexed Universal Life for Retirement

  1. 1. Between Whole Life and Variable, and Indexed Universal Life
  2. 2. Presented by Michael Grigsby Retirement Evangelist Freedom Equity Group | (541) 610-6375 and
  3. 3. • By way of review, there are two primary categories of life insurance: term and permanent. Most common are: Non permanent Permanent Term Whole Life ART (annually renewable term) Variable Universal Life Indexed Universal Life
  4. 4. • Protection for a specified period, such as the time until a home mortgage is paid off, or the kids are out of the house. • As an inexpensive insurance used to lock in insurability until a permanent insurance can be purchased. • An expendable insurance when living benefits are added, used to protect the value of a permanent insurance. • With some companies, a way of buying inexpensive death and living benefits coverage now, and rolling over part of your premiums into a permanent policy at a later date, guaranteeing insurability and not losing all your premium until then.
  5. 5. • Permanent life is most often used to ensure a death benefit throughout the lifetime of the policy. • Usually there is the ability to borrow against the policy for emergencies, life events, like college or a down payment on a home. • If a policy has living benefits, the policy acts as a lifetime catastrophic, chronic, and even disability protection program. • Some programs act as a retirement income replacement program. • Tax free funds.
  6. 6. • There are many types, but let’s briefly look at three: • Whole Life – Usually sold for its permanent death insurance and ability to borrow against when needed. Growth of the policy is normally through dividends and interest rates, providing modest growth. • Variable Universal Life – Sold as an investment and retirement vehicle, falling short and disappointing policy holders during the 2008 crash. It invested funds directly in the stock market, and illustrations failed to account for such a stock market crash. While still available, it is seldom sold, except to investors who can handle risk. Gave other types of UL policies a bad reputation, and the tool of choice used by financial advisors against insurance instead of their qualified plans. • Indexed Universal Life – Sold as an investment and tax free retirement vehicle, indexed based, with protection from market declines. Funds can be borrowed without touching the principle. Growth is through call options, capping the amount of growth, but protecting against market downturns.
  7. 7. • Let’s compare two popular permanent insurances: whole and indexed universal life. Whole Life Indexed Universal Life Policy loans Yes Yes Used as a generational bank account Yes Yes Provide a death benefit (face value) Yes Yes
  8. 8. • How do whole and IUL differ? Whole Life Indexed Universal Life Premiums Fixed Flexible Death Benefits Fixed Adjustable Loan Interest Rates Fixed or variable, determined by policy Fixed or variable, policy owner’s choice Over-loan protection Maybe Yes
  9. 9. Whole Life Indexed Universal Life Cash Values Guaranteed based on assumed interest rates of 3-4%, plus non guaranteed dividends declared by the insurance company, based on returns from company investment account. Grow with index linked to markets like S&P 500. Caps on gains of 13 to 14%. Hard floor of 0%, and some with guarantee of 3%. Protection from down market, and yearly reset locks in gains. Tax Free Retirement Yes, by surrendering dividends on cost basis, then using policy loans. Some policies with only the policy loan may perform better. Yes, when properly structured, can produce a lifetime of tax free retirement income, as long as policy is in force until death.
  10. 10. Whole Life Owner Benefits Indexed Universal Life Guaranteed Cash Values scheduled in contract, plus standard non-forfeiture options Reduced Paid-Up and Annuitization (partially taxable). Maximum Cash Accumulation Potential, with index linked interest credits upwards of 13-14% or more per year, with principal protection -No market risk, cash values never lose when the stock market index is negative. Annual reset. Flexible premiums and adjustable death benefits. Some with living benefits.
  11. 11. Whole Life Downside Indexed Universal Life Dividends are NOT guaranteed. Industry wide, dividends have been trending downward for the last two decades, as long term interest rates on bonds have trended downward. Whole life premiums and death benefits are NOT flexible, generally. Positive stock market index growth is NOT guaranteed. What this means to you is that cash values may earn zero percent interest when index is negative, but that's actually a positive result.
  12. 12. Whole Life Which one is better? Indexed Universal Life If client wants guaranteed cash value growth with some sacrifice on the potential upside during periods of stock market index growth, or wants the guaranteed option to elect a Reduced Paid-Up policy at some point in the future, and have substantial discretionary cash flows so that the non-flexible premium schedule does not present a problem, then Dividend Paying Whole Life maybe the best choice. If client wants maximum non-guaranteed cash value growth potential for either a lump sum cash need, a tax-free retirement income stream, or maximum nonguaranteed internal rate of return on death, and wants or needs a flexible premium structure, then Index Universal Life may be the best choice.
  13. 13. • It is the client’s choice, but I believe the IUL is a better overall vehicle for retirement. • It isn’t up to you or me, it is up to the client to decide. • It is important we can answer the client’s questions and offer an informed option to the client. • Clearly, those who do not sell IUL’s are not informed about them.
  14. 14. • Contact Mike Grigsby (541) 6106375, or mike@fegnw. • Contact me if you are not already adding Freedom Equity Group retirement products to your product offering.