IUL vs. Whole Life Insurance: What's the Difference, and Which Fits You?

Short answer: In the IUL vs. whole life comparison, both are permanent life insurance with a death benefit and a cash value. Whole life typically has level premiums and minimum cash values that must be guaranteed in the policy. Indexed universal life (IUL) has flexible premiums and, as FINRA puts it, “follows a set stock index (such as the S&P 500),” but its charges rise with age, its starting interest rate and charges aren’t guaranteed for the life of the policy, and it can lapse if the cash value runs out.

If you’re new to IUL, start with what IUL insurance is and how it works. This page focuses on how it stacks up against whole life.

What do IUL and whole life have in common?

Both are permanent life insurance. FINRA, which has jurisdiction over “the investment professionals and firms that sell insurance products that are securities,” says whole life “provides coverage for the life of the insured and can build cash value,” and that universal life “offers flexible premium payments and insurance coverage.” FINRA says indexed universal life falls under the universal life umbrella.

Both policies have:

• A death benefit paid to your beneficiary when you die.
• A cash value that builds inside the policy. The Texas Department of Insurance (TDI) says that with permanent policies, “a portion of each of your premiums is put into an account, known as the cash value.”
• A cost of insurance. The New York State Department of Financial Services (DFS) says whole life policies “stretch the cost of insurance over a longer period of time,” and that with universal life the company “deducts from the cash value account its expenses and the cost of insurance protection.”

How does whole life insurance work?

TDI says whole life “stays in effect for your entire life unless you cash the policy in or stop paying premiums,” and describes its premiums as “higher than term life at first, but usually don’t go up.” FINRA says whole life premium payments “typically remain the same for the life of the insured.”

DFS explains that to keep the premium level, “the premium at the younger ages exceeds the actual cost of protection.” Whole life policies include a table that “provides the minimum cash values that must be guaranteed in your policy.”

What about dividends? Some whole life policies are “participating.” DFS says “a participating whole life policy pays dividends,” and adds that “dividends are not guaranteed.” TDI says “your dividend could be lower than the company’s projection,” and suggests asking the company for a history of its projected dividends versus paid dividends.

How does IUL work?

DFS says universal life works “by treating separately the three basic elements of the policy: premium, death benefit and cash value,” and that this lets you “change or skip premium payments or change the death benefit more easily than with any other policy.” That flexibility has a catch.

• Charges come out of the cash value. FINRA says the cost of insurance protection “and in some cases other costs are deducted from the cash or policy account value.” DFS warns that “the mortality charges increase, as you become older.”
• It follows a stock index. FINRA says IUL “follows a set stock index (such as the S&P 500) rather than allowing policyholders to choose their investments.” IUL is life insurance, not a bank account or a direct investment in the stock market. Ask the agent exactly how the index affects your cash value, which parts of that calculation are guaranteed, and whether the insurance company can change them.
• Only some terms are guaranteed. For universal life, DFS says “the company guarantees a minimum interest rate and a maximum mortality charge,” but the interest rate and charges at the start are not guaranteed for the life of the policy.
• It can lapse. DFS says “you will need to actively manage the policy to maintain sufficient funding.” TDI says, “If the cash value reaches zero, your policy could lapse.”

FINRA says indexed universal life is “generally not considered a security.” Variable universal life is a different product, which FINRA says is considered a security.

IUL vs. whole life: side-by-side comparison

This table compares features only. Specific terms vary by policy, so check the policy and illustration you’re offered.

Is IUL better than whole life?

That depends on whether guarantees or flexibility matter more to you.

If knowing your premium and your minimum cash value matters most, ask to see a whole life policy’s table of guaranteed cash values. If you want room to change premiums or the death benefit, keep in mind that DFS says universal life requires you to “actively manage the policy to maintain sufficient funding,” and TDI says changes to your premiums and death benefit “could affect how long your coverage lasts.”

For a comparison with term coverage, see term vs. whole life insurance for seniors. For the full list of IUL trade-offs, read IUL insurance pros and cons.

How are taxes and cash value withdrawals treated?

Both are cash value policies, and the California Department of Insurance says “the cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy.” TDI says “you might have to pay a surrender fee if you withdraw the money early” and “if you withdraw more money than you paid in premiums, you’ll probably have to pay taxes on it.” For whole life, DFS says outstanding policy loans, “if not repaid, will reduce the death benefit,” and for cash value policies generally, the California Department of Insurance says “any outstanding loans are deducted from policy proceeds at death or at policy surrender.”

The California Department of Insurance says “some of these products may enjoy tax advantages while they remain active,” but “a policy lapse or surrender may create a taxable event and may generate a Form 1099,” so “be sure to check with your tax advisor.” RestAssured doesn’t give tax or investment advice, so ask a tax advisor before relying on cash value for income.

What should you ask before choosing?

Bring this checklist to any conversation with a licensed agent:

1. Can I see the guaranteed and non-guaranteed columns of the illustration? The National Association of Insurance Commissioners (NAIC) says a basic illustration “shows both guaranteed and non-guaranteed elements of the policy.” TDI says agents’ charts “are usually projections and aren’t a promise of a policy’s performance.”
2. For whole life: is this policy participating, and what’s the dividend history? TDI suggests asking for projected versus paid dividends.
3. For IUL: how long does the policy last on guaranteed values if I pay only the planned premium?
4. For IUL: how does the index affect my cash value, which parts are guaranteed, and can the company change them?
5. What are all the charges, and how does the cost of insurance change as I age?
6. What is the surrender charge schedule in the early years?
7. How do loans and withdrawals affect the death benefit and taxes? Ask a tax advisor about the tax side.
8. Are the agent and company licensed? TDI says to “make sure the agent and company are licensed to sell insurance.” You can reach the licensed agents who work with us at (888) 603-7464.

The bottom line

Whole life and IUL are both permanent life insurance with a cash value. Whole life typically has level premiums and guaranteed minimum cash values. IUL has flexible premiums and follows a set stock index, such as the S&P 500, and DFS says universal life needs active management to stay funded. Compare the guaranteed values side by side before you decide. The licensed agents who work with us offer IUL policies: call (888) 603-7464 to compare options and get a quote, with no obligation. Here’s how calling RestAssured works.

RestAssured is a brand of All Phone Leads, Inc. It is not an insurance company or an insurance agency, does not give tax or investment advice, and isn’t affiliated with any government agency. RestAssured connects callers with independently licensed insurance agents.

Frequently asked questions

What is the difference between IUL and whole life?

Whole life typically has level premiums and minimum cash values that must be guaranteed in the policy. IUL is a type of universal life with flexible premiums, and FINRA says it follows a set stock index, such as the S&P 500. Charges come out of its cash value, and it can lapse if the cash value reaches zero.

Is IUL better than whole life?

That depends on whether guarantees or flexibility matter more to you. Whole life typically has level premiums and guaranteed minimum cash values. The New York State Department of Financial Services says universal life gives you maximum flexibility, but you will need to actively manage the policy.

Which builds more cash value, whole life or universal life?

Whole life includes a table of minimum cash values that must be guaranteed in your policy. With universal life, the starting interest rate and charges aren’t guaranteed for the life of the policy. Compare the guaranteed and non-guaranteed columns of each illustration.

Is IUL an investment?

FINRA says indexed universal life is generally not considered a security. It is a type of universal life insurance that follows a set stock index, such as the S&P 500, rather than allowing policyholders to choose their investments.

Do whole life policies pay dividends?

Some do. The New York State Department of Financial Services says a participating whole life policy pays dividends, but dividends are not guaranteed.

Sources

• Insurance (life insurance types), FINRA
• Types of life insurance policies, New York State Department of Financial Services
• Life insurance guide, Texas Department of Insurance
• Life insurance illustrations, National Association of Insurance Commissioners
• Life insurance and annuities, California Department of Insurance

This article is for general education. Policy features, prices and eligibility vary by insurance company and state; your agent will explain the specific terms of any policy before you apply.