Whole Life v. IUL No Longer An ‘Either/Or’ Proposition

By Frank Chechel

For the past several years, whole life has been the top-selling life insurance product, when measured by premium volume. Yet sales of another product — indexed universal life (IUL) —have been growing exponentially since the 2008 financial crisis. IUL now stands second in popularity next to whole life, according to LIMRA sales data. Both products generally are sold for death benefit protection today with the potential for cash value accumulation and retirement income over the long term. But whereas whole life provides robust death benefit, premium and cash value guarantees along with steady dividend performance, IUL offers equity-linked upside performance combined with a certain level of downside protection.

It’s an “either/or” proposition

Clearly, both products resonate strongly with life insurance consumers. Interestingly, however, it’s not typical for an insurance agent to sell both products. Advisors generally tout only whole life or IUL to most of their clients and prospects. Asking the question, “whole life or IUL?” to an agent today could be compared to asking them whether they prefer Coke or Pepsi.

But why do agents, and ultimately their clients, need to make a choice between the two? Thankfully, there is no longer that need, since agents and their clients now have access to a better solution, one that combines the best of both worlds.

This is not a new concept

Carriers have been experimenting with this idea for some time, searching for a way to create a new variation of whole life paid-up additions (PUAs). PUAs are purchases of additional insurance (death benefit) that have a cash value. These purchases are made with dividends and/or a rider that allows the policyholder to pay an additional premium over and above the base premium. This creates the growth of death benefit and cash values in a participating whole life policy.

Previously, carriers’ efforts focused on replacing the dividend performance of traditional PUAs with the performance of the S&P 500 Index or a comparable equity market index. In fact, at least one carrier developed a “variable paid-up addition” for their whole life contract in the late 1990s, linking the cash value performance of the variable PUA to the movement of the S&P 500 Index. This product failed, however, due to two factors: the “dot-com bust” and the unlimited downside risk inherent in the product’s design.

How things have changed

It could be said, however, that this product’s failure was not because the idea was ill-conceived, but perhaps because the timing just wasn’t right. Fast-forward more than a dozen years to a new market environment, where consumers, agents and carriers emerged from the 2008 financial crisis becoming both familiar and comfortable with the concept of indexed insurance products. In fact, our view is that now is the perfect time to reinvent a new type of whole life PUA — specifically, an indexed PUA.

This innovation would work as follows, and offer these benefits:

• Upside potential, with downside protection: Indexed PUAs would be adjusted up or down, with respect to the traditional dividend, based on the performance of the S&P 500 Index, subject to both a cap and a floor.
• Guarantees that stay in place: This adjustment would only be available on PUAs, thus ensuring that the base whole life policy’s guarantees are not impacted by equity market volatility.
• Flexibility: Policy owners would have the ability to adjust their allocation between traditional and indexed PUAs over time as their needs change.

Today, we have the best of both worlds

Guardian Life recently introduced a new rider, The Index Participation Feature, that offers investment flexibility with a new dimension in cash value upside potential. It has the potential to provide attractive whole life guarantees, in tandem with the opportunity for index-linked upside potential — in a single product solution.

Of course, no single product will work for all consumers. Many will still prefer a traditional whole life product or traditional IUL policy. But given the significant size of the life insurance marketplace — with the popularity of both whole life and IUL — we believe the time is ripe for carriers and agents to begin offering a “best of both worlds” indexed PUA solution to their clients.

Frank Chechel is second vice president, product management, individual life, with Guardian Life. Frank may be contacted at [email protected].