Whole Life Insurance vs. Universal Life Insurance

There are two basic types of life insurance term and permanent or cash value life insurance. In this video, I'm going to talk about the difference between whole life and universal life insurance, both of which fall into the category of permanent life insurance. Please subscribe and hit the bell to be notified every time I upload a new video. Hey, I got good news for you. Life insurance covers pandemics. Both whole life and universal life insurance are comprised of two parts, a savings or investment portion and an insurance portion. You would commit to a monthly, quarterly or annual premium or contribution. You can also contribute a lump sum up front to supercharge your policy. Permanent insurance requires between 12 to 15 years to hold a reasonable cash value. Your cash value increases with every premium payment tax deferred and the interest you earn grows tax deferred, which of course increases your cash value. Now, there are three vehicles available to get a tax-free income in retirement, a Roth IRA, municipal bonds and permanent life insurance. Because permanent life insurance takes advantage of IRS code 7702, which allows your retirement income from your policy to be tax-free, your money grows tax-free, you pay zero taxes on your retirement income, no taxes on your estate and inheritance when you die, and your beneficiary pays zero taxes when they claim the life insurance death benefit. Permanent life insurance gives you protection from stock market crashes or downturns. There are no contribution limits, no age restrictions, no RMDs, and you have easy penalty-free access to your money. Most modern life insurance policies include living benefits, where you have access to the death benefit tax-free while you're alive if you are diagnosed as chronically, critically or terminally ill. It allows the death benefit to be distributed before death to pay for qualified medical expenses and long-term care. These are generally known as accelerated death benefits. One of the most powerful concepts behind both whole life and universal life is the ability to access your cash by taking loans from your cash value to say finance a car, a vacation, real estate, really whatever you wish. Because you're actually borrowing from the insurance company, they are using your cash value as collateral, so even though you take out a loan, that money is still in your account and keeps earning interest. Okay, so here are the key differences between whole life and universal life. With whole life, you have guaranteed level premium payments that will never change. Cash value accumulation is guaranteed at a fixed rate. Interest paid is typically adjusted annually and though not guaranteed, you may also receive an annual dividend from the insurance company. If it's a mutual insurance company, they represent part of the insurance company's profits and you can opt to receive it annually in cash, let it accumulate interest, use them to reduce your policy's premiums or buy additional coverage. And the death benefit is fixed and will never change. Now with fixed universal life, you have a fixed rate of return. Your premiums are flexible. Cash value accumulation is guaranteed at a fixed rate. Interest paid is adjusted monthly and not annually like it is with whole life. So during periods of rising interest rates, universal life policyholders will see their cash value grow at a much higher rate than whole life owners. There's no dividend and the death benefit is flexible. With indexed universal life or an IUL, premiums are flexible. Cash value accumulation is based on performance of the stock market and I'll explain how that works in a minute. Interest paid is adjusted monthly. There is no dividend and the death benefit is flexible. All right, so in order to understand indexed universal life, it's important to understand the concept of indexing. First though, just to keep things simple, the market strategy is an investment strategy where your money is in the stock market like an IRA, 401k or 403b. But with indexing, you choose an index like the S&P 500. Your money is not invested in the index, so it's not in the stock market. But you get a return based on the movement of the index. Your money grows however the index performs up to a limit or a cap. For example, we'll say 12%. Now if the market grows 15%, your money will only grow up to the 12% cap. But the trade-off is complete downside protection from market losses. So just like you would have a cap, you would also have a floor of zero. So the worst thing that could happen is you get zero interest in market downturns. In other words, you never lose anything ever. Take a look at this chart which shows you the difference in the market strategy versus the indexing model. The red line is the S&P 500 and you can see how volatile it was between 1998 and 2013. The blue line is the floor or the guaranteed return of the index product. And the green line is the indexing strategy. So you can see where I circled in blue on the green line that when the market goes down, you get zero growth because of the floor. We like to say zero is your hero. You lose nothing. You can also see that if you had your retirement savings in an index product, you would have lost nothing in the last recessions and you would have been ahead versus anyone with a 401k IRA, 403b. And it took approximately five years for the market to recover from the last recession. This is a comparison of the market strategy and the indexing strategy at a 12.5% cap with $100,000 balance over the last 20 years. If you'd have just gone to sleep and put your money into the S&P 500 index, you'd have $153,000 more in your account with a cap and a floor than you would have just writing it out. So to wrap things up, with whole life, think fixed guarantees and dividend. With universal life, think flexibility. Whole life gives you fixed premiums, guaranteed returns, a fixed death benefit, and a possible dividend. But it is the most expensive type of insurance. An IUL gives you flexible premiums, market-like returns, flexible death benefit, no dividend, and minimal fees if structured properly. Whole life insurance is best suited for someone who wants guarantees. An IUL or universal life is best suited for those who want flexibility. Now, if you are a high income earner making over $100,000 per year, there is a really special IUL that takes advantage of leverage when saving for retirement. So just like your employer may match your 401k contribution, a lender will actually match your IUL contributions, or premiums, times three. And if you would like to know more about this, please take my masterclass, What the U.S. Government and Wall Street Don't Want You to Know About Saving for Retirement. At the end of the masterclass, you'll get an invitation to apply for a free retirement income analysis, where you'll learn exactly how much income your current retirement plans will produce and how long it will last. And I will put a link down below in the description to my masterclass. If this video has been of value to you, please give it a like, make sure to subscribe, and hit the bell to be notified every time I upload a new video. Also, comment below with your biggest takeaway, and feel free to let me know what other topics you'd like for me to cover.