How they’re the same
To compare and contrast, highlight some of the shared features available from both types of policies. Because they are permanent life insurance contracts, whole life and IUL both offer the potential for building cash values and securing lifelong coverage.
Potential cash value —Cash value can accumulate and grow tax-deferred inside of these policies. Clients might use those funds for a variety of goals, including supplemental retirement income, education funding or to help pay the ongoing expenses inside of a policy. This can be accomplished through loans or withdrawals. However, it’s important to mention that outstanding policy loans accrue interest and reduce cash value and the death benefit.
Permanent coverage —As long as clients continue to pay the required premiums on time, the policy remains in force. Coverage can last for a lifetime—regardless of how long clients live. As a result, legacy-conscious clients can ensure that heirs receive a death benefit (to help with living expenses or liquidity needs, for example).
How they’re different
While whole life and IUL share several similarities, help your clients understand that premium payments and cash values work differently.Premium payments
Premiums may be important to some clients, while others have plenty of cash flow. Client preferences on how to handle premiums — as well as their monthly budget — may influence which type of policy they choose.
- Whole life — With whole life policies, clients receive a premium schedule at policy issue. As long as they pay the required premiums on time, coverage is guaranteed to stay in force and their cash value will grow as illustrated. But for the same face value, whole life premiums are typically higher than IUL premiums in the early years — guarantees come at a price.
- IUL premiums — IUL premiums are flexible. Clients can even skip premiums temporarily if they have sufficient cash value available. However, if clients pay too little or cash values dwindle, they may need to pay higher premiums in later years to keep the policy from lapsing.
Cash values
Although whole life and IUL policies can potentially provide cash values, those balances grow in different ways.
- Whole life — The cash value growth is guaranteed in a whole life policy. You can show clients exactly how much they’ll have available at any given time, assuming they make the scheduled premium payments. That’s helpful for those who plan to use cash value for critical goals like a specific retirement date or a child’s first year in college.
- Dividends — Dividend-paying policies may provide additional value, but dividends are never guaranteed, and some policies don’t offer dividends. If a policy receives dividends, clients can typically use those funds to buy an increased death benefit, receive cash, reduce their premium payments and more.
- IUL accumulation — The cash value growth in an IUL policy is subject to caps and floors and is based on the performance of a specified market index, such as the S&P 500. With good results, it may be possible for clients to accumulate a significant amount of cash value or stop paying premiums for a period of time. But if crediting is insufficient, clients may need to pay higher premiums to keep the policy in force.
- Interest crediting — Policies may offer different options for clients to grow their cash value, so the crediting rate depends on what clients choose and how those options perform. A fixed segment earns interest at a specified rate, which may change over time with economic conditions. An indexed segment is linked to the performance of a market index, typically subject to both caps and floors.
Different strategies for different needs
Neither type of policy is necessarily better than the other, and clients can choose a policy that fits best with their goals and strategy.
Whole life policies may appeal to conservative clients who appreciate predictability. They’ll know exactly how much they need to pay every year, and they can see how much cash value to expect in any given year.
IUL may be attractive to clients who need flexibility and who can afford the risk of having to pay more to keep the policy in force due to poor cash value growth.
Discuss this information with clients, and help them understand their long-term goals, current and future cash flow position, and the pros and cons of guaranteed vs. indexed interest. With that information, they should be well-equipped to pick a policy that meets their needs.
Product guarantees are backed by claims paying ability of the insurer.
SM.1225895.05.19
