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IUL vs. VUL: Which One is Better?

Just deciding to get a permanent life insurance policy to protect your loved ones financially and provide a little extra income in retirement is an important step. But, you’re not done yet. Now it’s time to look at the options for different types of life insurance policies so you can decide which one is the best choice for your particular needs. When it comes to life insurance for retirement income purpose, indexed universal life insurance policy (IUL) and a variable universal life insurance policy (VUL) are the top options. To determine which one is better for you, we need to consider various aspects: How comfortable are you with investing on your own? How comfortable are you with taking risks in investing? Are you searching for reliable and safe growth? Let’s explore the differences between an indexed universal life insurance policy (IUL) and a variable universal life insurance policy (VUL). 

Indexed Universal Life Insurance (IUL) for Retirement

In brief, an indexed universal life (IUL) insurance policy is a type of permanent insurance that allows people to pay a certain amount of money in premiums for lifelong coverage. The universal aspect of this policy allows policyholders to pay a minimum premium during times of hardship, adjust their cash-value, and change their death benefit as needed. The IUL is paired with a chosen market index and its cash-value grows each year based on the performance of the index. This set up allows for faster growth of the cash-value compared to a product, like whole life insurance which just increases at a modest yearly interest rate. Let’s take a look at the benefits and drawbacks of using an IUL for retirement income.

>>MORE: Understanding Indexed Universal Life Insurance: Why is It a Good Option for Retirement Savings?

Pros

  • IULs offer permanent coverage after the premium payments are met.
  • Cash-value grows more quickly compared to other insurance, like whole life insurance policies.
  • Cash-value is protected from market losses with a crediting floor, usually zero percent or 1%.
  • Policyholders can invest more money in this kind of account per year than with an IRA or Roth IRA.
  • Policyholders can buy as much insurance as they like without income limits.
  • No age limits on when you can start withdrawing money from the account.
  • The cash-value in an IUL can be withdrawn 100% tax-free to use as retirement income.

>>MORE: IUL or Roth IRA: Which One is Better for Retirement Savings

Cons:

  • IULs don’t grow as quickly as VULs due to not being directly invested in the market.
  • The IUL is also limited by a cap rate on how much the cash-value can grow in a year, usually 8%-12%.
  • An IUL can lapse if the target premiums aren’t met by the policyholder.
  • An IUL can also lapse if there isn’t enough money in the cash-value to cover annual fees.

>>MORE: Why is Indexed Universal Life Insurance (IUL) a Good Idea for Retirement Savings?

Variable Universal Life Insurance (VUL) for Retirement

A variable universal life insurance (VUL) policy is similar to an IUL in that people can use the market to grow their cash-value faster. However, with a VUL the cash-value is invested directly into stocks, money markets, and indexes. Like the IUL, a VUL allows policyholders to adjust their premium payments, adjust cash-value, and adjust death benefits during hardship. 

>>MORE: Understanding How Variable Universal Life Insurance (VUL) Works

The VUL does have other similarities to IULs, along with a few big differences. Let’s take a look:

Pros:

  • VULs also offer permanent life insurance coverage after premium payments are completed.
  • Policyholders can also invest more money into a VUL than a traditional IRA or Roth IRA, and buy additional insurance when desired.
  • VULs offer a lot more control by allowing policyholders to place their cash-value into multiple sub accounts to vary investments, up to 50.
  • Policyholders can withdraw money from their cash-value or take loans against it at any age.
  • The cash-value can grow faster and larger than with an IUL, if you know how to invest.
  • VULs usually have a higher cap rate, up to 14%-15%.
  • The cash-value also grows and can be withdrawn tax-free.

>>MORE: Best 10 Firms to Open a Roth IRA Account

Cons:

  • With more exposure to the stock market, the cash-value can shrink in bad years.
  • Policyholders will need to pay extra fees associated with their investment accounts.
  • If the cash-value shrinks too much there may not be enough money in it to pay fees and premiums.
  • The VUL may lapse if the policyholders aren’t able to keep up with scheduled premium payments.

Comparing IUL and VUL Policies

To present a better picture of how an IUL and a VUL insurance policy both grow and provide income for retirement, we’ll pull two illustrations from Securian. These policies are for a man, aged 32 who is a non-smoker in good health. He’s looking to make annual premium payments of $7,200 a year for about thirty years.

Securian Product Name: Premier Variable Universal LifeEclipse Accumulator Indexed Universal Life
Target Annual Premium$7,200$7,200
Minimum Initial Premium$234.21$154.53
Initial Death Benefit$295,844$295,728
Cash-Value at Age 65 $839,881$651,085
Total Death Benefit at Age 65$1,079,637$909,743
Growth Cap8.75%9%
Non-Guaranteed Illustrated Crediting Rates8%5.69%
Guaranteed Illustrated Crediting Rates2%2%

It’s easy to see straight away that Securian’s VUL offers a much greater potential for growth. The Premier VUL policy achieves a little over $800,000 in cash-value by the time the policyholder is 65 years old. Also, the total death benefit is just over $1 million

Even with a slightly lower growth cap of 8.75%, Securian’s VUL offers consistently higher returns when using the illustrated rates of each policy. These non-guaranteed rates may be different over time because they are based on the performance of the indexes and in the case of the VUL, dividends received. Of course, the dividend earnings are another reason why the VUL policy offers such great returns compared to an IUL. Over time those dividends add up.

If you want to get and compare several quotes more efficiently, you can work with a digital broker specializing in IUL and VUL such as Amplify. They are able to pull IUL and VUL quotes from several companies and help you compare and select the best one:

Final Thoughts:

Both the IUL and the VUL offer policyholders an opportunity to grow their cash-values more quickly by tying them to stock market performance. Where they differ is the amount of risk involved, as the VUL allows policyholders to directly invest their cash-value in up to 50 sub-accounts that invest in various indexes. This increased risk also brings the potential for larger cash-value compared to the IUL.

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