In the retirement planning marketplace, the ‘indexed universal life insurance vs. buy term and invest the rest’ debate continues. The proponents of indexed universal life (IUL) are typically insurance and retirement planning professionals. The proponents for ‘buy term and invest the rest’ are typically media personalities that believe in living debt free and are selling some type of course to show you how. I am pointing this out only to shed light on the fact that one group consists of licensed professionals and the other group consists of financial and life-style coaches.
Most debates on these two methods of investing that I have read or watched on video have managed to get pretty far into the weeds which typically motivates the audience to close the page or stop the video. The problem with this debate is that there are no guarantees. Neither side can claim without a doubt what the final result will be for any given point in time. Because of this, I prefer to point out what is better about each system of investing and what the worst case scenario for each might be. For purposes of this argument, ‘invest the rest’ means to invest in mutual funds the money you would save by buying a term policy instead of an indexed universal life policy. Those on this side of the debate typically choose mutual funds to make their comparisons.
The Death Benefit
The death benefit in an indexed universal life insurance policy is treated no differently than the death benefit in a term insurance policy. Both products provide a specific amount that is paid tax-free to the beneficiary except for one major difference. The death benefit in the IUL equals the face amount of the insurance policy plus the growth of the funds in the cash account. This is paid tax-free to the beneficiaries. The death benefit in the term policy includes only the original face amount. Of course, the value of the mutual fund doesn’t disappear with death, rather it goes into the estate of the account holder unless it is a payable on death account, but remains taxable nonetheless.
The Living Benefits
Both the indexed universal life insurance and the term life insurance policies typically include an accelerated death benefit so that a large portion of the death benefit can be paid to the policyholder in the event of a terminal illness. Most indexed universal life policies also have accelerated death benefits in the event of chronic and critical illnesses. This means that for catastrophic events such as a heart attack, cancer, stroke, etcetera that don’t kill you, your policy can provide cash when you need it most. What triggers this living benefit is spelled out in the policy terms and conditions and can vary depending on the insurer.
Unlike with an IUL policy, a term insurance policyholder cannot take loans or partial surrenders from the term policy to help manage critical life events because it’s a term policy and there is no cash value. The investor with the mutual fund account can withdraw funds, but that will be a taxable event, and it’s not considered a loan, but a sale of shares. Access to funds in the indexed universal life policy is non-taxable as long as withdrawals are from the premiums you have paid into your cash value or, if a policy loan is taken.
Term insurance is temporary, meaning it will expire. Yes, there will be a renewal offer, but it will come with severe sticker shock since the renewal rates are based on your new age. I’ll say it again; it’s temporary. The indexed universal life policy, if properly funded, is permanent life insurance. Yes, it is more expensive than term, but your premiums are flexible and usually stop at retirement when you are ready to start taking tax-free income from the policy. With term insurance, what you buy is what you have. Most term insurance policies will not allow you to decrease the death benefit or the premium during the policy term. With the IUL you can, it’s a flexible product that can change as your circumstances change. If you miss a payment on your term insurance, it will most likely lapse for non-payment whereas the indexed universal life insurance policy will continue since insurance cost can be paid with the cash that has accumulated in the policy.
IUL vs. buy term and invest the rest: The Earnings
This is where we can really get into the weeds. The good news is that we can give you a comparison of ‘indexed universal life vs buy term and invest the rest’. You would think, since there is a cap on how much the indexed universal life policy can earn, the mutual funds would outperform the IUL. Remember, the indexed universal life policy also has a floor that protects it from ever losing any money because of market losses. With the mutual fund, that protection simply doesn’t exist.
Do you remember the year 2000 through 2010? Many in the financial industry refer to this as the lost decade. According to Investopedia, “the period from 2000 to 2009 was a true ‘lost decade’ for most U.S. households, as steep declines in real estate and stock prices resulted in massive wealth erosion. The S&P 500 recorded its worst ever 10-year performance in that decade, with a total return including dividends of -9.1%, which was even worse than its performance during the 1930s depression.” An IUL policy eliminates the damage an extended economic downturn will reek on your family’s financial stability.
This basic comparison will be considered too simple for the financial professionals out there, and that’s a good thing. Retirement planning should be left to financial planning professionals and not TV and Radio personalities. It should be a personal decision for individuals and couples to make after getting the advice of someone who has professional credentials, like a license.
Getting Cheaper Life Insurance
The lower your insurance premiums are, the more money you have to invest. There are many ways to lower your insurance rates. Making a few changes can make a huge impact on how much you pay every month. If you want to cut your premiums to invest the rest (or if you’re buying a IUL and want to get cheaper coverage), there are a few changes you need to make.
First thing is first, regardless of which type of plan you’re buying, is to stop tobacco usage. Smokers have a much higher risk of suffering from a heart attack or being diagnosed with cancer, and the insurance company is going to offset the risk by charging much higher premiums. Smokers and tobacco users are going to pay minimum, twice as much for their insurance coverage compared to what a non-user is going to pay. If you want to save money, cut the cigarettes.
Another way to save money would be to improve your health. With either type of plan, you’re the insurance company is going to require you undergo a physical exam. The outcome of the physical is going to impact how much you pay in premiums. If you want to save money, improve your overall health.
The best way to guarantee that you are getting the best rates would be to compare dozens of quotes before you decide which kind of policy is best for you. Every company has different systems for rates and medical underwriting, which means the quotes you get could vary wildly. Finding the best company for you is the difference in getting a cheap policy or one which breaks your bank every month.
There are thousands of companies out there, which means you could spend hours calling companies or researching them online. Instead of wasting your time, let one of our independent brokers do all of the dirty work for you. Unlike a traditional insurance agent, our agents work with dozens and dozens of highly rated companies across the country. Working with our agents can save you both time and money on your insurance coverage.
We know deciding which kind of plan can be difficult. There are dozens of factors to consider, but we are here to walk you through the decision-making process. Our experienced agents have years of experience working with all types of clients across the country.
Life insurance is one of the best investments you can make for your loved ones. It’s one of the few ways you can ensure your family has the money they need, even if something awful were to happen to you. Just because life insurance is a safety net doesn’t mean you can’t use it as an investment vehicle as well.
Take a minute to request a comparison of term and IUL for yourself. We can offer the advice and information you need to make an informed decision. You can start by filling out the form to the left or give them a call at (800) 712-8519.