Indexed Universal Life vs. Term Life With Living Benefits
Life insurance is no longer just about providing a death benefit—it’s about building a flexible financial strategy that can support you during life’s unexpected turns. Two popular options for those seeking living benefits are Indexed Universal Life (IUL) and Term Life Insurance with Living Benefits. While both offer accelerated death benefit riders and protection for critical, chronic, or terminal illness, they differ greatly in structure, cost, and long-term value.
If you’re deciding between IUL and term life with living benefits, here’s a detailed breakdown to help you choose what fits best for your financial goals, budget, and protection needs.
What Is Indexed Universal Life (IUL)?
Indexed Universal Life is a type of permanent life insurance that offers both a death benefit and a cash value component. The cash value earns interest based on the performance of a market index, such as the S&P 500. IUL policies typically include:
- Flexible premiums
- Tax-deferred cash value growth
- Adjustable death benefits
- Built-in or optional living benefits riders
Because the cash value can grow over time, IUL is often used for long-term wealth accumulation, retirement supplement income, or legacy planning.
What Is Term Life With Living Benefits?
Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If you pass away during the term, your beneficiaries receive the death benefit. With living benefits riders included, you may also access a portion of that benefit early if diagnosed with a qualifying illness.
Common living benefits include:
- Terminal Illness: Life expectancy of 12–24 months or less
- Chronic Illness: Inability to perform two or more daily living activities
- Critical Illness: Heart attack, stroke, cancer, or organ failure
Many term policies now include these riders at no additional cost or offer them as affordable add-ons.
Key Differences at a Glance
| Feature | Indexed Universal Life (IUL) | Term Life With Living Benefits |
|---|---|---|
| Policy Duration | Lifetime (as long as premiums are paid) | Fixed term (10–30 years) |
| Cash Value | Yes, grows with market index | No cash value |
| Premium Flexibility | Flexible | Fixed for the term |
| Living Benefits | Included or optional | Often included |
| Cost | Higher initial premiums | Lower, especially for young buyers |
| Use Case | Long-term planning + protection | Affordable protection during working years |
| Conversion Options | Not applicable (already permanent) | May allow conversion to permanent |
When IUL Makes Sense
1. You Want Coverage for Life
IUL ensures you’re covered for your entire life, provided the policy remains funded. It’s ideal for people who want to leave a legacy, cover estate taxes, or support dependents indefinitely.
2. You’re Interested in Building Cash Value
Part of your premium goes into a cash value account that can grow based on index performance. This can serve as a supplemental retirement strategy or emergency fund.
3. You Want Long-Term Financial Flexibility
With tax-deferred growth and access to the cash value via policy loans or withdrawals, IUL offers options for future financial needs.
4. You’re Willing to Pay Higher Premiums for More Value
IUL policies cost more upfront but deliver more features and benefits in the long run.
When Term Life With Living Benefits Makes Sense
1. You Need Affordable Protection Now
Term policies are budget-friendly and perfect for younger individuals or families who need high coverage without a high monthly cost.
2. You Want Simplicity
Fixed premiums, straightforward terms, and easy-to-understand benefits make term life accessible and manageable.
3. You Want Access to Living Benefits Without Complexities
Living benefits are often built in, allowing access to part of the death benefit in case of a qualifying illness—no cash value or investment tracking required.
4. You Only Need Coverage for a Specific Period
If you’re insuring income during child-rearing years, covering a mortgage, or protecting a spouse until retirement, term insurance fits that timeline perfectly.
Living Benefits: How They Compare
Both IUL and term life policies offer living benefits, but how they’re structured can differ:
- Payouts: Typically a percentage (e.g., 25% to 95%) of the death benefit, depending on illness severity and policy rules.
- Triggers: Diagnoses must meet the insurer’s definition of terminal, chronic, or critical illness.
- Claim Process: Requires physician documentation and underwriting review.
- Impact: Any payout reduces the final death benefit paid to your beneficiaries.
The key distinction is that IUL living benefits are part of a larger financial strategy, while term life living benefits are focused purely on protection during a set timeframe.
Cost Comparison Example
Example: A healthy 35-year-old male seeking $500,000 in coverage.
- Term Life With Living Benefits: ~$30/month for 20 years
- IUL With Living Benefits: ~$200–$300/month (depending on funding and cash value goals)
The term policy offers more affordable protection, while the IUL offers lifetime benefits and cash accumulation.
Final Thought
Both indexed universal life and term life with living benefits provide valuable protection—but they serve different purposes. IUL is best for those thinking long-term, looking to build wealth, and willing to invest in lifelong coverage. Term life with living benefits is ideal for people who want cost-effective coverage and living benefit access during high-responsibility years.
Evaluate your financial goals, timeline, and budget before choosing. And, if you’re still unsure, speak with a licensed life insurance advisor who can help match you to the policy that fits your present and future needs.