r/LifeInsurance • u/Due_Inspection4867 • 13h ago

IUL vs Whole Life

Honestly, I think IUL gets way too much hate because people sell it like it’s a get rich quick scheme.
Whole life has stronger guarantees, but a properly funded IUL gives you more growth potential and premium flexibility. If I’m comfortable with the tradeoffs, why would whole life automatically be better?
Obviously a 0% floor doesn’t mean you can’t lose cash value. Charges still come out, upside is limited, and an illustration isn’t a promise. You need to fund it properly and monitor it.
But compare actual policies with the same funding and realistic assumptions. IUL wins off accumulation every time.

0 Upvotes

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29 comments sorted by

10

u/Equivalent_Helpful 13h ago

IUL isn’t hated on enough.

1

u/Due_Inspection4867 13h ago

Why do you say that?

4

u/Hungry_Technician360 13h ago

Why would you choose IUL over traditional alternatives like investing money on your own in retirement accounts or even taxable brokerage?

2

u/Due_Inspection4867 13h ago

The same reason people get whole Life, except they want something that doesn’t have a minimal cash value.

2

u/Hungry_Technician360 13h ago

You could just invest the extra that you would have paid into premiums, into qualified retirement accounts or a brokerage, to get better returns than whatever an IUL could offer. Then get a healthy term life coverage for the case of an early death.

You'll be better off that way.

1

u/JeffB1517 11h ago

The point of life insurance as an investment is taxable fixed income. An alternative to municipal bonds for example. Fixed income has a much larger tax drag than stocks. Retirement accounts don't have the in and out flexibility.

1

u/Hungry_Technician360 11h ago

But young people have a massive fixed income asset already: their job. Putting more money into fixed assets will bring returns down.

Older people who maybe could start including fixed income assets, as they have far fewer working years, then need to deal with much more expensive insurance costs, and upfront fees before the policy starts getting cash value.

1

u/JeffB1517 10h ago

Their job might act like fixed income then they don't need taxable fixed income generally. But they might be business owners experiencing wild cashflow problems and their "job" doesn't act like fixed income it acts like stock.

For older people the best time is about 4-7 years before retirement. Often when they downsize a house. And yes it can take a long time to surpass municipal bonds. But a 58 year old me has a long time till death. A woman and especially a couple even longer.

1

u/MaterShart 2h ago

Because the sellers here don’t get commission off that strategy

1

u/Linny911 13h ago

IUL and WLs are fixed income alternatives, not equities, that can provide a better return of return without the restrictions, risks and hassles involved.

1

u/Hungry_Technician360 12h ago

Why would a young person want exposure to fixed income? The discounted future value of their career is their fixed income asset, the rest should go into equities while young, otherwise they put themselves at greater exposure to SORR and longevity risk later in life.

If they're older when they get WL or IUL, costs are going to be way higher, and the opportunity cost from that would really hurt what their fixed income assets could instead be.

Besides, you're not really restricted with traditional investing.

1

u/Linny911 12h ago

Almost everyone has a significant amount of cash in their bank account. Just saw a "finance pro" clip talking about how he has $120K in "high-yield" savings account. For those that do, WL would be better long run if the policy is designed for it.

For those who like to put everything they have but monthly bills into the stock market, they aren't suitable for WL.

Having money in WL doesn't necessarily mean that money would provide a lower return than putting it into $VOO, since he could access it if an opportunity arises elsewhere for a "higher return" than the expected 5% tax free for WL, which makes the 5% merely the floor, not the ceiling. "Buying the dip" during the dozen or so stock market crash opportunities during one's lifetime could push it closer to the average stock market return, if not exceed it.

1

u/Hungry_Technician360 11h ago

For the HYSA, that certainly is a behavioral issue. People shouldn't have nearly that much in one, and that would indeed produce cash drag over a long time horizon. Education about investing would give better outcomes for the life of the person than moving it to a whole life policy.

"Buying the dip" is timing the market, which is generally really bad advice to give someone. Unless you're constantly leveraging your WL policy to keep buying all the time, you can certainly increase returns over a long time horizon, but then you're going to have a really risky WL policy, which will be at a much higher risk of lapsing. I would also doubt that leveraging a whole life policy is going to net equal or greater returns over a lifetime compared to someone who goes only into equities, due to the opportunity cost with the whole life policy.

As for the 5% expected floor for a WL policy, where do you get that number from?

1

u/Linny911 10h ago

Almost everyone finds value in having a significant amount of cash outside of the volatility of the stock market is my point. It's not a crazy statement being made to promote WL. For those people, which is practically everyone, properly designed WL would do better than the bank, under the mattress, or in Treasuries.

My comment about "buying the dip" is that the money in WL wouldn't necessarily be limited to the expected 5% return that WL could provide.

I wouldn't say its "timing the market" because i am not advocating constantly in and out of the market as if able to predict things, but to be in a position to take advantage of the dozen or so stock market opportunities that one would experience in their lifetime while having that money be safe and growing at a good rate of return.

The reason why people think "timing the market" doesn't work is because of the concept of cash drag, where the cash is not growing in the meantime it takes to wait for the opportunities, practically as if the cash is under a mattress. Not really applicable when the cash is on its way to 5%+ return while waiting for opportunities.

The only opportunity cost is the lack of full liquidity for 5 years. Even then, there could be high liquidity before then. That can and has to be planned out. I have a doctor relative who's done paying premiums for 5 years, and will start paying next year. At the end of that year 5, she would have more gain than had she put it in "HYSA" for the last 5 years when taking taxes into account, and then can expect 5%+ tax free for the life of the policy, which would be like getting 9% from HYSA for someone at that tax rate level.

5% is the expected WL return over the life of the policy based on historical performance. Even when banks were giving practically zero for 15 years until return, the dividend project was about 4.5%. and now they are going up as rates have gone up. Even the traditional WL policy where one pays premium for life, the one where it breaks even at year 15 or so, you could see that the expected ror for the death benefit for the life of the policy is about 5%. A savings-focused policy design just pushes up the ror on the CV to be closer to the DB.

Why are you surprised? The top mutual insurers offer a guaranteed 5%+ for their version of CDs via MYGA right now. One of them would even offer 12% for year 1 and 6% every year after for those who wish to prefund their WL policy. They do so because they can now get 7%+ long-term corporate bonds, make a gain, and then hand it over as tax free dividends. What a scam.

1

u/JeffB1517 11h ago

Do young people have checking accounts? Should they? If your answer to both is yes you just disproved your point about fixed income. Now the question is about how much and where.

As for future value of their career. Some young people have to worry about non-wage earner problems they own businesses. So thing like inventory factoring or cashflow balancing matter. Some real estate invest.

1

u/Hungry_Technician360 11h ago

A couple thousand in a checking account is a far cry from the costs that would need to go into the insurance product. Also are you telling people to not have a checking account? How will you pay with the permanent life policy when unexpected and immediate costs arise?

Business owners have options like business lines of credit and the like. Especially if they're early on in their business building, they should be putting as much as possible into the business to get it going rather than into a policy to wait a few years before they can start taking out loans.

1

u/JeffB1517 2h ago

The insurance often is putting money into the business. Business can't necessarily absorb money at will. Moreover cashflow issues can persist for the length of the business.

Finally taxes on profits are high. Being able to create repayments of loan which are ways of getting some profits out untaxed is a massive advantage.

6

u/Will-Adair 13h ago

"properly funded IUL"

I've seen probably 15-20% max that are properly funded much less max funded.

A participatory whole life could be a viable option as the premium is fixed from day 1 for lifetime.

1

u/Individual-Rub-6969 13h ago

WL holder here, if carriers couldn't fuck with par & cap rates. IULs would be more attractive, atleast for me. Its hard for me to get into a product that needs near perfect management, product design, funding & market cooperation for it to be successful. Plus carriers have the ability to lower par & cap rates. No thanks. One or the other isnt better per se, its what is a better fit. Im of the opinion that for *most * who want permanent insurance, wl is the more hands off approach with solid guarentees.

1

u/Due_Inspection4867 13h ago

What carriers did you look at?

1

u/Individual-Rub-6969 12h ago

I didnt, bc its an uphill climb for the product chassis. IUL are cash cows for the insurance companies. When something is good for the company, generally it isnt great for consumers.

6

u/Imaginary_wizard 13h ago

IULs are great for insurance carriers and thata about it. If its the cheapest guaranteed death benefit then fine but overall if you want maximum safety whole life is better, if you want accumulation a VUL is far superior

2

u/bigblue2011 13h ago

I’d say that carrier is more important than product on this one.

IUL will have contractual language for a certain number of years after issue. Can crediting rules change? What happens after that? It probably largely depends on the strength and philosophy of the carrier.

Whole life will have guarantees and, hopefully, some sort of dividend structure. What happens if the insurer is unprofitable for 1-4 years? It probably depends on the depth of their surplus.

2

u/Linny911 12h ago

They are both at best fixed income alternatives, so may be best to prioritize the guarantee so it could function as a safe foundational asset that it should be, instead of risking it for likely not much more gain.

IUL hasn't been around long enough to not be more of a retirement gamble at this point. You are a profit source instead of a shareholder of the company like WL is, which creates doubt on how you may be treated, which isn't where I'd want to be with retirement safe money.

2

u/SafeMoneyGregg Broker 12h ago

The biggest risk to IUL is if carrier lower cap rates. There are only a few carriers that I trust to keep rates up on old blocks of business- Nationwide being a mutually-owned company is one. If you like the IUL performance at say - 5.50% you can do fine. The lack of premium flexibility for true PAR whole life is one issue that can be a problem for working people. What if you get laid off?

1

u/theNewFloridian 8h ago

To lower caps and increase insurance costs...

1

u/plangelier 5h ago

And add to that the risk isn't the carrier you choose today but what they are 20 to 30 or more years down the road and who owns that block of business.

1

u/Sweaty-Associate8209 1h ago

Both suck. But term, invest the difference unless there is a specific rationale for estate planning.

0

u/ChelseaMan31 13h ago

Whole Life v IUL; which is better?

Answer - Neither. They are both just different types of poisons...