What's the difference between indexed universal life vs. whole life insurance?

The main difference between whole life insurance and indexed universal life (IUL) insurance is how the cash value operates. Whole life insurance cash value grows based on a fixed interest rate. In contrast, insurance companies tie IUL cash value to a stock market index's performance. IUL also differs from regular universal life insurance, which has a cash value that grows based on non-equity earned rates.

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What are indexed universal life and whole life insurance policies?

A whole life insurance policy covers you for life. It has cash value that grows at a fixed interest rate and is the most common type of permanent life insurance. Indexed universal life insurance is also permanent, but it's a specific type of universal life insurance with cash value tied to a stock market index's performance rather than non-equity earned rates.

All universal life policies can increase or decrease your premium as your cash value grows. Your cash value can also increase your death benefit. These features don't apply to whole life policies. Learn more about whole life versus universal life insurance.

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Advantages of whole life vs. IUL

Premium and fees

Whole life insurance provides the stability of a fixed premium, and it's generally more affordable than indexed universal life insurance. On the other hand, IUL offers the flexibility of adjusting your premium and even skipping payments as your cash value amount allows. But it also comes with additional fees that could vary vastly from payment to payment due to the complex nature of the policy's structure and cash value.

Value growth

Whole life insurance cash value grows at a guaranteed fixed rate. It's main benefit to the policyholder is the ability to take out a life insurance loan if needed. IUL value has a minimum guaranteed interest rate. However, the policy ties the rest to the performance of a set grouping of stocks like the S&P 500 or NASDAQ. This makes IUL value growth riskier and also potentially more rewarding, depending on market performance. Additionally, IUL cash value may eventually grow enough to result in a no-cost policy — that's when the built-up value can pay for all your premiums.

Death benefit

With a whole life policy, your death benefit is fixed (as long as you don't have a loan on the policy when you pass away). Suppose your whole life cash value amount grows to equal the policy's death benefit when you reach a certain age (usually 100–120). Then, the insurer will pay out the face amount directly to you and terminate your policy. Contrastingly, with IUL policies, your death benefit can increase as your cash value grows, leading to a potentially higher payout for your beneficiaries.