IUL vs. Whole Life Insurance: Which is Better?

Thang Truong
Thang Truong
Updated on:

When you’re looking around at various life insurance policies, how do you decide which one is the right policy for you? You could listen to your insurance agent, but he/she has a vested interest in selling you an expensive policy. There are a lot of different life insurance policies available, seeking to accomplish different things. What product is best for you depends on what your financial goals are. 

Here we compare two popular options: Whole life insurance vs. Indexed Universal Life insurance.

What is Whole Life Insurance?

Whole life insurance is permanent life insurance with a savings account component attached. As the name implies, whole life insurance lasts your whole life. It’s designed to offer financial protection to your dependents and leave them some money when you pass away.

Whole life insurance costs much more than say, term life insurance because of the savings component, called the cash value. This is different from the death benefit, which is the amount your beneficiaries receive after you die. For example, if you buy a $100,000 whole life insurance policy, $100,000 is the death benefit. In addition, cash value builds in a tax-deferred savings account. You can borrow from this account (with interest). If you don’t pay it back, the loan amount is subtracted from the death benefit.

If your whole life insurance is held by a mutual company, you might earn dividends. You can either re-invest those to get more insurance or you can pay the premiums. Learn more about dividend paying whole life insurance policies.

Whole life insurance comes with hefty premium amounts, because of the cash value and the conservative interest rate you earn on the cash value account of a whole life policy, usually at 2%. On the other hand, the cash value in indexed universal life insurance policies usually earn a much higher interest rate of 5-7% thanks to its growth tied to the performance of market indexes such as the S&P 500.

>>MORE: A Guide to the Best Whole Life Insurance Companies

What is IUL Insurance?

IUL (Indexed Universal life insurance) is also a type of permanent life insurance, meaning it lasts your entire life. It also features a cash-value component, but unlike whole life insurance, this money can be invested in an index. An index is a group of investments that reflect the market as a whole. Popular indexes are the S&P, and the Nasdaq 100. In this way, it’s like investing in an index fund or an EFT.

You’re not actually investing in the market, just that the company uses the index to set the interest rate.  There is a guaranteed minimum interest rate, but it fluctuates based on market performance. There is often a cap on how much interest you can earn. For example, if the market performs spectacularly and earns 30% but your cap is set at 10%, you’ll earn 10%. However, if the market returns negative numbers, in other words, loses money, you will earn 0% or 2% interest rate as the floor rate. But you won’t actually lose money, you just don’t make any or make very little that year. Different insurance companies offer different cap rates and floor rates in their IUL products, be sure to check out our recommendations of the 6 best IUL companies before making the final decision on the company you want to go with.

>>MORE: Should I Invest in S&P 500 Index Through an Indexed Universal Life Insurance Policy?

Indexed Universal life insurance is non-guaranteed universal life insurance—the rate of return is not guaranteed, and may, in fact, be 0% or 2% at the floor rate of the policy.

>>MORE: Case Studies of Universal Life Insurance

How does IUL Compare With Whole life insurance?

Which type of insurance is best for you depends on your long-term goals. In a nutshell, if your main goal is to grow cash value account and benefit from its tax-free withdrawal benefit to supplement your retirement income or for any personal purpose, you should go with an indexed universal life insurance policy. If you main goal is to have a guaranteed permanent death benefit for your beneficiary when you pass away, you should choose a whole life policy.

With that, let’s have a closer look at their similarities and differences:

Similarities Between IUL and Whole Life Insurance

  • Both are types of permanent life insurance—they last your entire life
  • Both build cash value
  • Both allow cash value account to grow tax-deferred and when you withdraw from or take a loan against the cash value account, it is tax free.
  • Both offer a lump sum, tax-free death benefit to your beneficiaries

Differences Between IUL and Whole Life Insurance

  • Indexed Universal Life usually offers a higher rate of return in the cash value account.
  • Whole life insurance has a guaranteed rate of 2%, whereas IUL is based on market performance. However, the average rate of return of the S&P 500 over the last 40 years is roughly 8%.
  • You really need a competent financial advisor or life insurance agent to set up a IUL policy correctly
  • With IUL, you want to have the lowest death benefit possible—most of the premiums should go to the cash value
  • IUL is more flexible; it’s easier to withdraw or borrow from the cash value. You can skip, increase, or decrease premiums
  • IUL always requires a medical exam; whole life is easier to get if you’re older or have health issues and don’t want to have a medical exam, you can get a small whole life policy of $5,000 – $25,000, usually for final expenses.
  • IUL can be a bit more complicated than whole life insurance because of its flexibilities. If you don’t understand all of their features well, it can sound a bit complicated.
  •  IUL is a lot less expensive than whole life

In general, although Indexed Universal life insurance is more complex, it often results in a higher rate of return. Cash value grows at a faster rate, and fees are usually lower. You really need a competent financial agent to set a up an IUL policy correctly.

>>MORE: Understanding Indexed Universal Life Insurance – Is It Good for Retirement Planning?

Compare an IUL Quote with a Whole Life Insurance Quote

To put this in proper perspective, we got two quotes for the same man, who is a 40-year old and living in California: one quote for whole life policy and the other for indexed universal life policy. He doesn’t smoke and exercises regularly. He wants to pay premiums for 20 years only, from 41-60 years old and $300,000 death benefit.

For a more thorough breakdown of whole life insurance quotes, see Whole Life Insurance Quotes: How to Get and Compare Multiple Quotes?

Below are the breakdown of the two policies based on their illustrations, focusing on the guaranteed permanent death benefit:

Whole Life QuoteIndexed Universal Life Quote
Carrier and ProductPenn Mutual Guaranteed Whole LifeNationwide Indexed UL Protector 2
Guaranteed Permanent CoverageYesYes
Guaranteed, Permanent Death Benefit$300,000$300,000
Annual premium$3,110$6,240

For the same guaranteed permanent death benefit of $300,000, the cheapest whole life quote is more than double that of an indexed universal life insurance. It is just ridiculously expensive.

To compare another aspect of the two policies: cash value growth, we choose another indexed universal life policy from Allianz. Below is the breakdown:

Whole Life QuoteIndexed Universal Life Quote
Carrier and ProductPenn Mutual Guaranteed Whole LifeAllianz Life (Pro+Advantage)
Permanent CoverageYesYes
Annual Premium$6,240$3,787
Guaranteed cash value at age 90 Yes – $256,173No
Guaranteed death benefit at age 90Yes – $300,000No
Non-guaranteed cash value at age 90 $853,113 – Depend on dividend payout$1,414,387 – Depend on the invested indexes perform 
Non-guaranteed death benefit at age 90 $994,807$1,485,106

With a much cheaper premium (almost half) than that of whole life policy, an indexed universal life policy (Allianz Life Pro+Advantage product) provides a much bigger cash value account, $1.4M at age 90, almost 66% more than the cash value account of a whole life policy. We should keep in mind that both are on non-guaranteed basis since they depend on the performance of the indexes and the dividend amount. Again, whole life insurance policy is just ridiculously expensive.

>>MORE: Understanding How Dividend Paying Whole Life Insurance Works

Last Thoughts

Whole life and IUL offer different ways to achieve financial goals. Which policy is right for you depends on those goals. There is no right or wrong policy, it’s what works best for you. 

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

More Stories

6 Best Indexed Universal Life Insurance (IUL) for 2023

Are you looking for a way to set aside some extra money for your senior years, and maybe a little extra for loved ones to inherit? Most people opt for indexed universal life insurance because it offers the greatest cash value growth tied to the performance of S&P 500 index with the least risk thanks […]

Best Self-Directed Roth IRA Companies for 2023

A self-directed Roth IRA is much like a regular Roth IRA, but offers more flexibility as far as what you can invest in. Whereas a regular Roth will only let you invest in stocks, bonds, mutual funds, ETFs, and real-estate investment trusts, a self-directed Roth lets you invest in a greater variety of investment options.  […]

The 5 Best Hybrid Long-Term Care Insurance Companies for 2023

If you’ve decided to plan for every eventuality, you’d be smart to include a plan to cover long-term care. Someone turning 65 this year has an almost 70% chance of needing some type of long-term care, and about 13% of those will need it for five years or more. Long-term care is expensive and can […]

The 3 Best Traditional Long-Term Care Insurance Companies for 2023

Long term care is something that no one likes to think about, but unfortunately, many people will eventually need. Health care costs are skyrocketing, and a lengthy stay at a long-term care facility can easily bankrupt most people’s nest eggs. Long-term care insurance is one way to protect both yourself and your retirement savings. Out […]

The Best Long-Term Care Insurance Companies in California for 2023

California residents who are keen to protect themselves and their families against the worst events in life may be considering long-term care insurance. However, you might not know much about LTC insurance or how it is handled in California. Let’s take a look: What is Long-Term Care Insurance? Long-term care insurance helps pay for long-term […]

The Best Long-Term Care Insurance Companies in Arizona for 2023

Arizona is a great place to retire. It’s warm, there’s no snow to shovel, and Arizona improves the quality of life for anyone with allergies or asthma. When you pack your bags and retire to Arizona, you’re probably not thinking about long-term care. But the sad reality is that 47% of men and 58% of […]

The Best Long-Term Care Insurance Companies in Florida for 2023

There’s a lot of good reasons to retire in Florida. The weather is warm, the beaches are beautiful, and there are lots of other retirees to socialize with. Also, Florida has no state income taxes, no inheritance taxes, and no estate taxes. When you pack up your things and move to Florida, you’re probably not […]

Private Placement Life Insurance: Everything You Need to Know

If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.  What is Private Placement Life Insurance? Who Qualifies for Private Placement Life Insurance? Benefits of Private Placement Life […]

Nationwide IUL – A Strong Product With Great Features and Excellent Ratings

The Nationwide IUL product can help you either supplement your retirement income or ensure your beneficiaries future by leaving them a nice tax-free death benefit. Obviously, you have many options when it comes to IUL policies, so you want to know how does Nationwide’s policy stack up against the competition? Let’s take a look. Pros […]

Transamerica IUL – A Solid Product but High Consumer Complaint Score & Law Suits

Consumers looking to supplement their retirement income often settle on an indexed life insurance policy. These policies build cash value based on market performance and allow your heirs to enjoy a tax-free death benefit. Let’s take a look at Transamerica’s indexed universal life insurance policy and see what makes it stand apart from other such […]