Whole life or IUL? Match the policy to the job.

We build strategies on both policies, so the question that matters to us is which one fits the job you have in mind. Neither one is better for everyone.

Side by side

Guaranteed values depend on premiums being paid as the contract requires. Non-guaranteed elements, including dividends, caps, participation rates and charges up to contract maximums, can change.

How each one grows

Whole life: a guaranteed schedule, plus dividends

A whole life policy’s cash value grows on a guaranteed schedule written into the contract, as long as premiums are paid. Participating policies are also eligible for annual dividends. Dividends aren’t guaranteed, and the insurer sets them each year, but many participating carriers have paid dividends every year for decades.

Dividends can buy paid-up additions, small blocks of fully paid insurance that add to both the death benefit and the cash value. Many designs also include a paid-up additions rider, which lets you pay extra premium to buy additions directly, within limits the insurer sets.

IUL: index credits within a cap and a floor

An IUL policy’s cash value is credited based on an index’s performance. In strong years, credits are limited by a cap, an upper limit the insurer sets and can change within contract limits; some designs also use a participation rate. In down years, index credits never go below 0%. Policy charges come out every year, so cash value can decline in a 0% year.

Under current tax law, cash value grows tax-deferred in both.

Borrowing against each

With either policy, you borrow by sending the insurer a loan request. The insurer lends you its own money and holds your cash value as collateral, with no credit check. Loans accrue interest, paid to the insurer, and unpaid loans reduce the death benefit. Under current tax law, a loan is generally not taxable income while the policy stays in force and is not a modified endowment contract (MEC).

Whole life loans and dividends

Carriers handle loans and dividends in one of two ways. With non-direct recognition, the dividend is figured the same whether or not you have a loan outstanding. With direct recognition, the dividend on the borrowed portion of cash value is adjusted, up or down, based on the loan rate. Neither method is better in every case.

IUL loans and index credits

In many IUL designs, your full account value keeps earning index credits while a loan is outstanding, and loan interest accrues on the other side. The net result depends on the spread: positive in strong years, negative in a 0% year.

When whole life tends to fit

Whole life tends to fit when you want guaranteed, predictable values, can commit to a fixed premium for many years, and plan to borrow against the policy along the way.

• You want values you can count on: a guaranteed cash value schedule and a premium that can’t rise.
• You plan to borrow for purchases, a business, or opportunities and repay on your own schedule. That’s the Banking Action Plan.
• You’re working through debt in a planned order and want life insurance in place while you do. That’s the Debt Action Plan. Behind on payments or facing collections? Start with a nonprofit credit counselor (find an NFCC member agency). Free Growth Financial sells life insurance. We don’t contact your creditors, make payments for you, or negotiate your balances.
• You’d rather not keep an eye on caps and index crediting.

When IUL tends to fit

IUL tends to fit when you have a long horizon, want flexible funding and more upside potential (with more year-to-year variation), and are building toward retirement income.

• You’re building income for retirement. That’s My New Retirement.
• Your income varies, and you want room to fund more in some years and less in others.
• You want credits linked to an index, with a 0% floor in down years.
• You’ve outgrown the caps on 401(k), IRA, or Roth contributions.

Using both

Plenty of people own both: a whole life policy for cash they expect to use along the way, and an IUL for retirement income. A common path is to start with a Banking Action Plan and add My New Retirement as income grows.