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Whole Life Insurance vs
Indexed Equity Life Policies
Difference between Whole Life Insurance &
Indexed Equity Life Policies
Whole Life Insurance Vs. Indexed UL
What type of life insurance policy is best to help create wealth for retirement? When people ask this question, they may hear the phrase "LEAP" being referenced. LEAP is a selling system that has a complex software program. Information is placed into the system and it tells users how they can make changes to maximize the amount of money that can be found to fund a cash value life insurance policy. While the software is sophisticated, it uses an outdated life insurance product as the main way to help a client build their wealth through cash value policies.
It is debatable whether LEAP is the best way to determine what type of policy to purchase. To make this decision, you should be aware of what a whole life insurance and an Indexed UL policy is and understand how they can generate wealth.
What is Whole Life Insurance?
Whole life is an insurance policy that does not lend itself to new policy designs that are often used to maximize cash values and borrowing without tax burdens from the policy. It is a stable policy and a way to generate cash to use in retirement. The returns from a whole life policy are tied directly to the dividends of the insurance company.
The Disadvantages of Whole Life Insurance
The caveat is that the cash that is in a whole life policy will grow only if the insurance company does well financially. Whole life is also the most expensive life insurance policy that can be bought, which results in the cash value being depressed. Whole life is a good type of policy, but clients will not get the returns that would come near the market rates of return.
National Underwriter Magazine
Insurance Rate Advertised Returns vs. Actual Rate of Return
National Underwriter Magazine issues an annual article that displays the difference between illustrated rates of whole life insurance companies and the actual returns on the policies. This information can show hoe being aggressive with how insurance companies illustrate returns is a growing problem. The following chart shows the illustrated rates and actual rates from 1987 to 2007.
| WHOLE LIFE INSURANCE CO. | ADVERTISED RETURN | ACTUAL RATE OF RETURN |
|---|---|---|
| NORTHWESTERN MUTUAL INSURANCE | 7.39% | 5.43% |
| GUARDIAN INSURANCE | 7.92% | 4.2%> |
| NEW YORK LIFE INSURANCE | 7.8% | 4.76% |
This chart shows the policies returned about 2-3% less each year. Additional charts can be downloaded here: Whole Life Insurance: Actual 10-year and 20-year Rates of Return
Indexed Equity Life Insurance (EIUL)
Indexed Equity Life policies are the better choice if clients are looking to build wealth. These policies will lock in the investment gains that are pegged to the S&P 500. Clients cannot go backwards because of downturns in the market and they will be able to earn gains that track the market up to the cap.
Indexed policies have variable loans and these can increase the amount of money that is able to be borrowed from the policy tax-free in retirement. A common type of Indexed Life insurance is Revolutionary Life. This type of policy has a high cash value option, per 1000 charge waiver and free long-term care benefits.
There are many advisors that will not sell this type of policy because they are relatively new. Some advisors have not even taken a look at them and just continue to sell Whole Life - a big mistake. Individuals should have all options available to them as they look to invest in a life insurance policy and insurance companies should research Indexed Life policies and determine whether they should offer them to clients.
It is possible to determine the possible returns of an Indexed Life policy by looking back over the years. The chart below examines policies over the last 22 years and will show how the Indexed Life policies would have performed based on given variables. The ending value for the last year shown will end in January of 2008. The numbers displayed show what the policy would have returned with 100% participation and a 12, 14 or 16% annual cap.
Indexed Life Policy Returns with 100% Participation & 12%, 14%, 16% Annual Cap
| PARTICIPATION | 100.00% | 100.00% | 100.00% |
|---|---|---|---|
| CAP | 16% | 14% | 12% |
| FLOOR | 0% | 0% | 0% |
| 22 YEAR ANNUALIZED RETURN | 9.63% | 8.86% | 8.00% |
S&P 500 Concerns with the Indexed Life Policy
Many individuals may be concerned about what could happen if the S&P 500 goes flat. They wonder if a Whole Life policy would be a better choice. Based on the locking feature of the policies, this is not a huge concern, but if clients do want to hedge their bet, they could make use of Revolutionary Life which will credit 140% of S&P 500 returns for the year.
Revolutionary Life Insurance Credit of 140% of S&P 500 Returns
| PARTICIPATION RATE | 140.00% |
|---|---|
| CAP | 12% |
| FLOOR | 0% |
| 22 YEAR ANNUALIZED RETURN | 8.66% |
Managing Director, Estate Street Partners, LLC
Mr. Beatrice is an asset protection, award-winning trust and estate planning expert.
Estate Street Partners, LLC
Uncompromising, Alternative and Exclusive Estate Planning & Wealth Management for an Accelerated Chartered Roadmap to Financial Success
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