Quora Answer: Which is Better Life Insurance: Whole Life, Indexed Universal Life, or Variable Universal Life?

The following is my answer to a Quora question: “Which is better life insurance: whole life, indexed universal life, or variable universal life?”

Whole life policy provides coverage for your whole life, taken to be either age 100 years, or 101 years.  The sum assured is determined at inception, and is guaranteed to pay out upon your death, or if you have the riders, for disability and critical illness.  These policies have a cash value that builds up over time.  The policy is in force as long as the premiums are paid.  The coverage may be varied at the policy owner’s request, which may require further underwriting.

An indexed universal life policy allows the policy owner to allocate cash value amounts to either a fixed account, or an equity index account, the participating fund.  It is a variation of a whole life policy, and is identical in all other areas.

A variable universal life policy builds a cash value.  This cash value can be invested in a wide variety of funds, which the policy owner may choose from.  It is also known as an investment-linked plan.

A base whole life policy is the standard plan.  An indexed life policy gives you the option of building up cash value, treating the policy as a financial instrument, and not just a policy.  It is useful for varying your coverage according to your needs since some polices allow you the option of withdrawing the index fund portion, while still maintaining some level of coverage.  The investment-linked plan is useful in fund movements since you may top up, and withdraw funds, at any time.  The premiums may be more expensive than a whole life policy since there is an investment aspect to build the cash value in addition to the mortality charge.

These polices have different uses depending on the needs of the policy owner, and many people have more than one type.  The preference for these and other types of policies is dependent on many factors that the financial health review is supposed to establish, from your risk profile, to age, to coverage to investment horizon.