What Types of Life Insurance Are There–And Why Is IUL the Best?
As you likely know, life insurance can be a critical part of your overall financial planning. It’s a smart way to provide a death benefit to your beneficiaries after you pass away. The death benefit can help cover the costs of your funeral, and, depending on the size of your policy, it can provide much-needed financial support for those left behind.
You also might have heard that life insurance can provide advantages above and beyond the death benefit. Millions of Americans utilize Whole Life and Universal Life insurance for those additional benefits, such as the ability for the cash inside your policy to accumulate on a tax-advantaged basis.
What you may not yet know is that with a properly structured, maximum-funded Indexed Universal Life policy (what I also call an IUL LASER Fund), you can get all the benefits listed above, along with the opportunity for tax-free income for living benefits. I’ve had clients access money tax-free from their IUL LASER Funds for everything from business ventures to real estate, college tuition, emergency funds, and more.
Think of this article as your comprehensive life insurance overview to help you explore what’s best for you.
3 MAIN TYPES OF INSURANCE
To get started, let’s review the three main types of life insurance:
Term Life Insurance
Essentially, Term Life insurance guarantees payment of a predetermined death benefit if the insured (the person covered by the policy) passes away during a specified term (often 10, 15, or 20 years). If the term expires and the policyholder is still alive, the policy can be renewed for another term, converted into permanent coverage (such as Whole or Universal Life insurance), or allowed to terminate. It has no cash accumulation value or living benefits. Coverage lapses the moment premiums are no longer paid into the policy.
While it has these restrictions, the appeal of Term insurance is that it’s less expensive than many other types of life insurance. Some people follow the advice to “buy term and invest the difference.” In other words, they buy the less-expensive Term Insurance, then take the rest of their money earmarked for savings and put it into another financial vehicle. This way they’ve got their death benefit covered, and they’re taking steps to (hopefully) accrue retirement income down the road.
Whole Life Insurance
Whole Life is similar to a level-premium term policy, in that you pay a level premium for the life of the policy, but there are key differences. Unlike Term insurance, Whole Life provides permanent death benefit coverage for the life of the insured (not just for a specified term). Whole Life also adds the advantage of a savings component, where cash can accumulate on a tax-advantaged basis. You can choose to reinvest dividends into the policy’s cash value and earn interest. (There are variations of Whole Life insurance, but this gives you the basic idea.)
Universal Life Insurance
Universal Life insurance is another type of permanent life insurance (with death benefit coverage for the entire life of the insured), that offers a cash value accumulation element. The beauty of universal life insurance (and Whole Life) is the money inside of the policy accumulates tax-free.
DIFFERENCES BETWEEN WHOLE LIFE AND UNIVERSAL LIFE
Whole Life provides a safe place for you to set aside your money where it can grow tax-deferred. You can also access your money through tax-free loans or tax-free withdrawals up to basis (and then pay taxes on any money taken out over and above basis), and your heirs will receive an income-tax-free death benefit upon your passing (the income-tax-free benefit applies to both state and federal income taxes).
As for differences, with Whole Life insurance you can receive dividends (which currently average 4% to 5%), and you can choose to reinvest your dividends into the policy to increase the cash value and death benefit. With The IUL LASER Fund, you don’t receive dividends, but your policy can earn interest based upon index strategies (which have historically averaged 5% to 10%). And with multipliers, you can see potential averages of up to approximately 11% to 15%. So there are plenty of opportunities for growth with IUL LASER Funds (see Section I, Figure 6.4).
Whole Life policies also come with guarantees: a guaranteed cash value and a guaranteed death benefit amount. The IUL LASER Fund’s cash value can vary, growing in market up-years and remaining static during down-years (based on your index performance, with the protection of a 0% floor during market downturns). The IUL LASER Fund’s death benefit can increase due to policy performance and can decrease if there are any outstanding loans or if you make adjustments to your policy to save on costs.
There are several more differences between Whole Life and Universal Life–if you’d like to know more, you’re invited to order a free copy of my book, “The LASER Fund,” using the link at the bottom of this article.
3 TYPES OF UNIVERSAL LIFE
Universal Life insurance offers three primary types:
Fixed Universal Life
Here, policyholders can expect reliable cash value growth based on a fixed interest rate, which is often the same interest rate that the company’s fixed general account portfolio earns (general account portfolios are typically comprised of AAA and AA bonds, real estate investments, and more). These policies tend to be less risky than other universal life policies, but their growth potential is also the most limited.
Variable Universal Life
Here, the majority of the policyholder’s premium is invested in a choice of investment accounts, which could include fixed-income, stocks, mutual funds, bonds, and money market funds. Because the money in the policy is tied to market-based investments, policy cash values can stand to gain–and lose, depending on market conditions. For this reason, variable policies are often considered the most risky.
Indexed Universal Life
Here, policyholders can choose from a variety of index strategies, which means the money in their policy is linked to index strategies, without the money actually being in the market. These policies also offer a 0% guaranteed floor, which can provide a good degree of safety and help protect policyholders in market downturns.
WHY I RECOMMEND INDEXED UNIVERSAL LIFE
Indexed Universal Life has some superior advantages, which is why I recommend IUL LASER Funds as my favorite financial vehicle:
You can access money in your policy at any time, tax-free, via loans. Need money for a home repair? Borrow it. Want money during retirement for annual tax-free income? Borrow it. As explained in “The LASER Fund” book, there are certain guidelines to avoid collapsing your policy and/or creating a taxable event, so be sure to talk to your IUL specialist to ensure you’re accessing your money the Smart Way.
With IUL policies, “zero’s the hero.” Because your money is not actually in the market (just linked to the market), you have the reassurance of a 0% ground floor. This means your policy will not lose cash value due to market volatility during a year that the market goes down. And when the market goes up, you can get the benefit of that increase based on your index choices, up to a cap (or no cap, depending on your index strategies). Personally, I’ve earned as high as 39.22% in an up-year, and since 2000, I’ve averaged 8.47%.
Predictable rates of return
Historically, based on index strategies, the average annual return that most people have achieved during the last thirty years is 5% to 10%. Personally, in any given period, I’ve usually been able to earn at least 2% higher rates of return in Universal Life than Whole Life, because I’m able to structure it under IRS guidelines to perform better with an internal rate of return.
IUL policies offer powerful tax advantages, including after-tax contributions (which means you’re getting your taxes over and done with at your current tax rate and bracket, not tomorrow’s, which can save you money in the long run), tax-free growth, tax-free income, and income-tax-free transfer of wealth to your beneficiaries upon your passing.
It’s important to educate yourself on your options when it comes to life insurance. It’s also important to keep in mind that any life insurance policy is not an investment and, accordingly, should not be purchased as an investment. It can, however, be used as part of your overall strategies to pursue a brighter financial future.
Want to Learn More?
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Elevate Your Financial Dimension
Find out how you can improve your Financial Dimension journey and seize the liquidity, safety, predictable rates of return, and tax advantages of an IUL LASER Fund. Explore the in-depth financial strategies and learn from real-life client experiences by claiming your free copy of “The LASER Fund” book at LASERFund.com. Just pay for shipping and handling, and we will send it to you, absolutely free.
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