IUL vs Whole Life Insurance Comparison – Episode 531  

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We’re going to be talking about two elements here, which is IUL versus whole. Now, many of you may be sitting there going, what language is this? And what does that mean? And there’s a specific reason why we’re talking about this because we’re going to compare IUL versus whole against something that you know every single day. So first, Kim, what is IUL and whole? And then let’s hear the comparison. All right. Well, we are talking about life insurance here, and we have such a fun comparison that makes this so easy to understand. The terminology that you’re using are distinctions of two similar but not the same products. So whole refers to whole life. This

[00:54] is an ancient, literally centuries-old product that has been around for a long, long time, offered only by mutual life insurance companies, of which there are about 20 in the United States and about four, I think, in Canada. IUL stands for index universal life. It is what we’re going to be talking about is this other product. Again, I’m going to give you an analogy that will just land. And index universal life is sometimes called equity index universal life. There is a cousin of it called variable life. There is another cousin of it called fixed universal or just regular universal life. If you happen to look at a life insurance policy and you see the words flexible, premium, adjustable life, all of that type of product

[01:47] falls into a single category known as universal life. And we’ll wait for it. Here’s the analogy to help you get clear on the difference. Universal life of any type is like a mobile home. Whole life from any mutual company is like a brick and mortar home with a proper foundation. Yes. Yes. So let’s hear the difference. And I’m just thinking of this because one values to the ability to move or recall the permanent versus temporary structures. And in my mind, I actually call IUL something else. I have a little three-letter piece that I use for that, which is HOC. You may be saying, what does HOC mean? Yes. Whenever I think of IUL, I think of house of cards because I think it’s all going to collapse.

[02:48] So tell us why mobile home versus house. Well, the analogy plays out perfectly. So I’ve actually lived in a mobile home. We spent three years building the home that we live in now. And during that time, we lived in a mobile home on the property so that we could keep an eye on the building, et cetera, the building process. And it is utterly amazing the environment that a mobile home or a trailer home. So I’m not talking about the kind that you would put behind a truck. I mean, yes, they get moved, but, you know, these are supposed to be homes and they are, we had a wonderful home. We had a double wide, we had redone it all. But here’s what was interesting. Every time we went to Lowe’s or Home Depot to buy parts

[03:35] for said mobile home, you cannot buy regular parts. So if you need to replace your faucet in the sink, you can’t go buy a Delta faucet or some other brand that would equate to quality. You have to buy what is literally lesser quality trailer home parts. And it is sad because the nature of that product is very dangerous in a storm, right? Like storms literally blow away mobile homes or trailer homes. The product itself, while it provides what you would call a home in terms of a house, it is very, very weak. There are all kinds of issues where the faulty method of construction that is used to create that mobile home is evident. Whereas a brick and mortar home on a foundation can survive a storm. It has all

[04:43] types of quality parts that you can buy for it. And it will be there literally centuries from now could be there. Whereas a mobile home, there’s no way it would ever last that long. And that analogy plays out in your house of cards fits right in with it plays out perfectly with the whole life insurance, which is the brick and mortar home that can be there for somebody’s whole life. That’s why it’s called that versus the universal life environment, which though called life insurance is a house of cards. And it could work. You know, we lived in the mobile home for three years. Nothing happened. It was okay. But the chances of it working long term are extremely slim. Okay. So let’s work from this analogy

[05:38] because you’re mentioning that the chances of it working. So in that language, it means it’s more risky. Yeah. Okay. So let’s go through and let’s kind of analyze a few things. One is what about cost? Does IUL cost less than whole? So it does. And this is part of the appeal, just like a mobile home costs less than the same size, regular home on the same property. And so that appeal and Americans and Canadians, both are really bad about this. That appeal of lesser cost comes with it, more risk, less benefits, et cetera. And there are many, many life insurance agents that truly do not understand the difference. I did not understand the difference for the first five years of my work in the life insurance industry. You’ll even hear it called almost like whole life. Well, almost

[06:47] is not the same as equal. And so whole life is whole life and universal life of any type costs less and is more risk. More risk is shoved from the insurance company to the insured and the owner of that policy. Okay. So let’s dive into the risk piece, because we’ll say we’re going to keep a positive mindset and say, if a person has set this up, they had an advisor, an agent, someone do this for them. Let’s assume that it was goodwill. The agent advisor thought that was the best. Now they realize they have a mobile home, there’s a storm coming. What do they do? You shrink the policy. So let’s say you started out with a million dollar death benefit and you’ve accumulated maybe $10,000 of cash value. You go to the life insurance company

[07:45] or to the agent, if they’re still helping you and you ask them to shrink that death benefit. So maybe it gets pulled down as low as two or three or 400,000. It’s going to depend. There’s some actuarial science that has to get weighed in there. And then ideally that will let you stop contributing to that insurance policy while still maintaining the death benefit for as many years as it will last. And maybe it’ll only last three or four more years. Maybe it’ll last 30 years, which would be great. It would literally just be like term insurance and that would be perfectly fine. That is the solution. And then you redirect those dollars to what is probably going to be a smaller whole life product where you have

[08:31] essentially zero risk. You have a guaranteed premium, guaranteed cash value, guaranteed death benefit. And that structure while boring is more effective. Okay. Just to unpack the language, you said you would transfer it over into a smaller policy. Are you talking about in terms of a smaller death benefit policy, or are we talking about a smaller contribution policy? Thank you for clarifying. So let’s pretend that this original million dollar universal life, you were on the younger side. And so you were paying $8,000 a year for the premium. That same 8,000 should get moved over to pay for a whole life product who is going to have a death benefit of maybe $600,000, I’m guessing, but in that ballpark again

[09:22] for a younger person. And so this is evidence of the fact that universal life like a trailer home has less substance and consequently costs less. Whereas if you want permanence, and last time I checked, death is a guaranteed event. And so we want to have permanence. And the definition of permanent is that that death benefit will pay when you die, even if you’re 110, 120 years old. And like a brick and mortar home that literally could be there a century later, that substantiability, that permanence is critical when you’re talking about life insurance and a guaranteed event called death, you want to guarantee death benefit with that. And the typical universal life structure does not have that. And even if

[10:18] they add a rider, because there is a guaranteed death benefit rider, it is still not the same. A guaranteed death benefit writer would be like, sometimes you see mobile homes and they’ve actually had a roof built over them. Like somebody came in and installed like a metal roof building just over the mobile home itself. It’s still not the same thing as a brick and mortar house with a proper foundation and a metal roof that’s attached to the home. So that analogy plays out also. Oh, that’s so good. So the last question that I have with this piece is going to be related to sunken cost. So what happens is if you set this up because you felt this was the best option because of the information you had,

[11:07] you’ve been doing it for a number of years. Now you have more information, correct information. It’s difficult to change emotionally because, oh no, I put my money here. Oh no, I’m older. Oh no, the time. How do you help someone through that? Well, the sunk cost fallacy is true. And that is that sometimes we continue something because of what we have done in the past. And that’s generally not a good idea in any environment. So the beauty of shrinking an existing universal life policy is that whatever cash value is in there will remain and you will have some death benefit. In my example, you took a million and let’s say you shrunk it to 200,000 or 300,000, that will be there. Now it may not be there for the

[11:58] rest of your life, but it will be there for a period of time. And that’s why I recommend that strategy as opposed to just canceling it because you overcome the sunk cost fallacy of just losing everything. And I also want to add that if you moved the $8,000 over as an example in our premium environment to get the smaller whole life policy, you would also probably want to buy some term insurance on top. And this is the other really tricky thing in the life insurance space. Most often whole life and term insurance are compared as if you should do one or the other. That is almost 99.9% of the time, never the right approach. The right approach is to have whole life insurance and term insurance and to get that higher death benefit while still

[12:52] working with the cash flow capability that you have. So in our example, it’s the same 8,000, let that buy your whole life insurance, spend maybe a thousand bucks a year buying a million dollar term insurance policy that’s going to sit there in addition so that if death occurs early, you still have that higher death benefit. So it’s whole life plus term insurance. And I have a fun little saying that we’ve put on the podcast before it’s WL plus T equals HLV. So that’s whole life plus term insurance equals human life value. And that’s HLV. And that’s 15 to 30 times your income or one times your gross worth. And hopefully we can find that podcast and put a link in the show notes so people can go back and hear the

[13:45] whole definition of human life value. Oh, that’s so good. So you’ve helped us unpack that for all of you listeners. If you have an IUL policy, one thing that you mentioned was to not go and pull up the phone and cancel it and end everything right away. You’re saying be a little bit strategic. So my call to action is send an email, go to hello at prosperity thinkers.com, send an email, talk about your situation, Kim, you can analyze it and then create a strategy for executing on it. There’s one last piece that hit me as we were talking through this. And I’m going to connect the dots. I don’t know if it’s right or if it’s wrong, but we’re going to try it. Okay. All right. So many of our listeners

[14:35] know, and you as well have been a real estate investor. I’ve been an investor. I’ve owned mobile houses. I’ve owned multifamily, single family, all of that. One thing I’ve noticed in the mobile home world, who’s the one that makes all the money? It’s the mobile home park owner and the IUL game. The insurance companies are the one that make the money and the consumers are the ones that typically wish that they would have done it the right way. Yep. Your analogy is accurate, plays out thoroughly. And how cool is that? It’s usually you have to an abandoned analogies at some point, but we found one that stuck the whole way through the whole way. Exactly. So listeners, again, if you’re trying to figure

[15:19] out what to do with your IUL, you have friends or family that have been talking about it, or maybe they have it, again, send an email to hello at prosperity thinkers.com to get those questions answered. That is for people that are already working with you, Kim, or people that are not. So again, even if you’re not a client or in the network or on the email list, anything like that, you can send the email to hello at prosperity thinkers.com. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.