Read This Before You Buy an Indexed Universal Life (IUL)

In Part 1 of this series “A Beginner’s Guide to Indexed Universal Life (IULs)”, we covered what an Indexed Universal Life (IUL) policy is and the mechanics such as the floor rate, participation rate, and segment cap rate that determine how your policy's cash value grows.

In this article, we compare IULs against term and whole life insurance, explain how premiums really work, and help you think through whether an IUL is the right fit for your circumstances.

How is an IUL different from Term Life and Whole Life insurance?

Term life insurance is designed to provide the highest amount of protection at the lowest possible cost. It covers you for a fixed period (i.e. for 20 or 30 years) and pays a death benefit if you pass away during the policy term. Because there is no cash value component, premiums are relatively low, making term insurance an efficient way to cover large financial obligations such as a mortgage, provide for young children or secure income replacement.

Whole life insurance provides lifelong protection while building cash value over time. Premiums are generally fixed and contractually guaranteed, and the policy offers a greater degree of certainty than an IUL. However, this predictability comes at a price, as whole life premiums are usually significantly higher than those of comparable term insurance.

Indexed Universal Life (IUL) also provides permanent insurance protection, but with a cash value that earns interest based on the performance of a selected market index, subject to features such as the floor rate, participation rate and cap rate. It also offers greater flexibility than whole life, allowing policyholders to adjust premiums (within policy limits) and allocate their cash value between fixed and indexed accounts. In exchange for this flexibility and growth potential, an IUL is more complex and offers fewer guarantees than a traditional whole life policy.

The difference in premiums

One of the biggest differences between these plans is how premiums work.

With term life and whole life insurance, premiums are contractually guaranteed. Assuming no changes are made to the policy, the premium quoted when you purchase the policy is generally the premium you will continue paying throughout the guaranteed period.

An IUL is different. Most IULs are flexible-premium policies. While an adviser will typically recommend a planned premium designed to keep the policy sustainable over the long term, that premium is based on assumptions about future policy performance and is not guaranteed to be sufficient. If the policy's cash value grows more slowly than illustrated, or if insurance costs are higher than expected, additional premiums may be required in the future to maintain the desired level of coverage.

While this flexibility can be an advantage, it also means that an IUL requires periodic review to ensure it remains on track.

Understanding the Sum at Risk and your Cost of Insurance (COI)

Another important concept to understand is the insurer's Sum at Risk. The Sum at Risk is the difference between the policy's death benefit and its accumulated cash value. For example, if an IUL has a death benefit of $1 million but has accumulated $100,000 in cash value, the insurer is effectively taking on a Sum at Risk of $900,000.

This Sum at Risk is used to calculate your Cost of Insurance (COI), also known as the Insurance Charge. The COI is deducted regularly (typically monthly) from your policy value to pay for your life insurance coverage. The amount is generally based on your Sum at Risk and factors such as your age, gender, smoking status, health, country of residence, and underwriting risk class. Since mortality risk increases with age, the underlying insurance rates also generally rise over time.

One of the key mechanics of an IUL is that while insurance rates increase as you get older, the insurer's Sum at Risk generally decreases as your cash value grows. In the early years, the cash value is relatively small, so the insurer bears most of the death benefit. Over time, as the policy accumulates value, a larger portion of the death benefit is effectively funded by your own cash value, thus reducing the insurer's exposure. This helps offset some of the higher age-based insurance rates and keeps the actual insurance charges more manageable. If the cash value eventually grows to equal or exceed the death benefit, the Sum at Risk falls to zero, significantly reducing or potentially eliminating the Cost of Insurance.

Because the insurer is taking on a much larger risk in the early years, a larger portion of your initial premiums goes towards insurance charges and policy expenses rather than building cash value. This is why IULs are often described as being front-loaded. They are designed to be held over the long term, allowing the cash value to compound over time while gradually reducing the insurer's risk.

By contrast, term life insurance does not accumulate cash value. Since the insurer only provides protection for a specified period, term insurance can offer a high level of coverage at a relatively low cost, making it well suited for temporary protection needs such as income replacement during your working years or covering outstanding financial obligations.

Cost of Insurance (COI) varies between insurers

It is also important to understand that Cost of Insurance (COI) rates vary across insurers and products. Every insurer uses its own pricing assumptions, mortality experience, product design and charging structure. As a result, some policies may have lower insurance charges in the early years but increase more sharply later in life, while others may charge more upfront but experience a more gradual increase over time, as illustrated below.

For this reason, comparing only the initial COI can be misleading. What matters is how the insurance charges evolve over the lifetime of the policy, as this directly affects cash value accumulation, policy sustainability and long-term performance. When evaluating IULs, it is therefore important to consider the overall COI pattern alongside other factors such as policy charges, crediting assumptions and projected policy values, rather than focusing on a single year's insurance charge.

Why Buy Term and Invest the Rest (BTIR)?

While FSM Global offers Indexed Universal Life (IUL) policies, we believe that no single solution is suitable for everyone. If you have recently been introduced to an IUL and are wondering whether it is the right fit for your financial goals, it is worth understanding an alternative strategy known as Buy Term and Invest the Rest (BTIR).

The BTIR strategy:

The concept behind BTIR is simple. Rather than paying the higher premiums required for a permanent life insurance policy such as an IUL, you purchase an affordable term life insurance policy to meet your protection needs and invest the premium savings into a diversified investment portfolio.

Who suits BTIR?

For many individuals in their 30s, 40s and even early 50s, the primary objective is to protect their family during their working years, replace lost income if they pass away, or ensure that outstanding liabilities such as a mortgage can be repaid. Since these are generally temporary protection needs, term insurance can often provide the required level of coverage at a much lower cost than a permanent policy.

The lower insurance cost means more capital remains available for investing. With decades before retirement, those investments have a longer period to compound, allowing them to ride through short-term market volatility and potentially benefit from long-term market growth.

How the BTIR strategy compares

The illustrations below compare BTIR against a single-premium IUL using the same initial capital.

For temporary coverage to age 65

For an age 40 non-smoker male seeking USD 800,000 (approximately SGD 1 million) of life cover, a Term Life plan to Age 65 costs approximately USD 781 per year, compared with a USD 79,624 single premium for an IUL.

Assuming the premium savings are invested at an illustrated annual return of 7.20%, the Buy Term and Invest the Rest (BTIR) strategy produces a projected Total Estate Value of approximately USD 1.16 million by age 65, growing to approximately USD 15.7 million by age 120 under the illustrated assumptions as shown in the table below.

Key Takeaway: If your protection needs end around retirement, a BTIR strategy may be a more capital-efficient approach. This allows you to secure the required insurance coverage while directing more capital towards long-term investing and may provide a substantially higher estate value than purchasing an IUL.

For coverage to age 99

For an age 40 non-smoker male seeking USD 800,000 (approximately SGD 1 million) of life cover to age 99, annual Term Life premiums increase to approximately USD 3,938.05. Despite the higher premiums, the Buy Term and Invest the Rest (BTIR) strategy still provides both life insurance protection and a growing investment portfolio while the policy remains in force.

Assuming the premium savings are invested at an illustrated annual return of 7.20%, the BTIR strategy produces a projected Total Estate Value of approximately USD 1.75 million by age 99, exceeding the illustrated death benefit provided by the Indexed Universal Life (IUL) policy as shown in the table below.

The advantage of BTIR during this period comes from holding two assets simultaneously: an USD 800,000 term life insurance policy and a growing investment portfolio. Together, these provide a higher total estate value while the term policy remains active.

Key Takeaway: Even when protection is required until age 99, BTIR may still provide a higher total estate value during the insured period by combining affordable life insurance with long-term investment growth.

When does an IUL make more sense?

As individuals approach retirement, financial priorities often begin to shift. Rather than focusing primarily on accumulating wealth, many become more concerned with preserving capital, providing liquidity for estate planning, and leaving a guaranteed legacy for future generations.

The following illustration considers an age 50 non-smoker male whose primary objective is leaving a guaranteed legacy rather than maximising wealth during their working years. For this type of objective, an Indexed Universal Life (IUL) policy may be the more appropriate solution.

In this illustration, the individual purchases term insurance to age 99. Compared with someone purchasing the same cover at age 40, there are fewer years for investments to compound, while the annual term premiums are significantly higher. As a result, less capital is available for investment under the Buy Term and Invest the Rest (BTIR) strategy.

The illustration highlights one of the key trade-offs between BTIR and an IUL. While the term policy remains in force, BTIR generally delivers a higher total estate value because beneficiaries receive both the USD 800,000 term insurance payout and the value of the growing investment portfolio. During this period, the combined value exceeds the IUL death benefit.

However, once the term policy expires (at age 99 in this illustration), the insurance protection ends and only the investment portfolio remains. By contrast, the IUL continues to provide a permanent death benefit. Over time, the IUL strategy eventually overtakes the BTIR portfolio, making it more suitable for long-term estate preservation.

Key Takeaway: For individuals in a similar life stage whose primary objective is leaving a lifelong legacy, an IUL may be the more appropriate solution. While BTIR can generate a higher estate value while the term policy is active, that advantage ends when the term cover expires. An IUL continues to provide lifelong death benefit protection, making it better suited for estate planning and intergenerational wealth transfer.

The importance of investing the difference

A Buy Term and Invest the Rest (BTIR) strategy only works if you consistently invest the premium savings and earn reasonable long-term returns. Buying a cheaper term policy is only half the strategy with the rest dependent on your discipline to invest and stay invested.

An illustration:

The illustration above assumes the investment portfolio earns only 2.0% p.a., instead of the earlier 7.2% p.a. assumption. Under this lower-return scenario, investment growth is insufficient to keep pace with the ongoing term insurance premiums. As a result, the investment portfolio is gradually depleted and, from Year 25 onwards, no longer generates enough value to fund the annual premiums from the original investment pool.

This means the BTIR strategy not only underperforms the IUL, but also becomes not self-sustaining. To keep the term policy in force, you would need to contribute additional funds out of pocket each year. Otherwise, the term policy would lapse, leaving you without the intended insurance protection and causing the BTIR strategy to break down.

This illustrates an important point: BTIR is not automatically the superior strategy. Its success depends on consistently investing the premium savings and achieving sufficient long-term investment returns. If either discipline or investment performance falls short, an IUL may be a more suitable solution for those seeking lifelong protection and estate planning objectives.

Ultimately, neither approach is universally better. The right choice depends on your financial discipline, investment experience, risk tolerance, and whether your primary objective is to maximise long-term wealth accumulation or to leave a legacy for future generations.

Not sure whether a Term plan or an IUL is right for you?

At FSM Global, we believe insurance and investments should be planned together. Whether you are considering a Buy Term and Invest the Rest (BTIR) strategy, an Indexed Universal Life (IUL) policy, or simply want an objective second opinion, our specialists can help.

Click the button below to schedule a complimentary session with our insurance specialist.

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*Please check with our team if the product you want is available on FSMOne Insurance

Disclaimer:

Returns displayed in this article are indicative only and used solely for illustration purposes.

The BTIR and IUL illustrations are based on the MAPS Conservative Portfolio 1-year return and an official IUL Benefit Illustration (BI), respectively. Both are for illustrative purposes only and are not guaranteed.

The views and opinions expressed herein do not reflect or represent the official views, positions, or policies of any insurer(s) and shall not be construed or relied upon as such.

All materials and content found in this article are strictly for information purposes only and should not be considered as an offer or solicitation to transact in any product. This article is not a contract of insurance.

Insurance products are underwritten by the respective insurance partners and distributed by iFAST Financial Pte Ltd (“iFAST”). You are advised to review the specific terms, conditions and exclusions in the relevant policy contract.

You are advised to read the key product documents, including (but not limited to) the product summary, before deciding whether the product is suitable for you. You should consider carefully if the products you are purchasing are suitable for your financial objectives, experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of a product, please seek advice from a financial adviser before making a decision to purchase the product.

While iFAST and its third-party providers strive to provide accurate and timely information, there may be inadvertent omissions, inaccuracies, and typographical errors. Opinions expressed herein are subjected to change without notice.

The comparisons and opinions provided are based on publicly available data/information and are intended to provide a general overview of the insurance products discussed. These comparisons do not cover all available products and may not fully illustrate every aspect of the products discussed.

Purchasing a life insurance policy is a long-term commitment, and early termination may involve significant costs. The surrender value, if any, may be zero or less than the total premiums paid.

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Read This Before You Buy an Indexed Universal Life (IUL)

How is an IUL different from Term Life and Whole Life insurance?

The difference in premiums

Understanding the Sum at Risk and your Cost of Insurance (COI)

Cost of Insurance (COI) varies between insurers

Why Buy Term and Invest the Rest (BTIR)?

The BTIR strategy:

Who suits BTIR?

How the BTIR strategy compares

When does an IUL make more sense?

The importance of investing the difference

Available Term and IULs on FSM Global:

You may also be interested in:

Disclaimer:

Returns displayed in this article are indicative only and used solely for illustration purposes.

The BTIR and IUL illustrations are based on the MAPS Conservative Portfolio 1-year return and an official IUL Benefit Illustration (BI), respectively. Both are for illustrative purposes only and are not guaranteed.

The views and opinions expressed herein do not reflect or represent the official views, positions, or policies of any insurer(s) and shall not be construed or relied upon as such.

All materials and content found in this article are strictly for information purposes only and should not be considered as an offer or solicitation to transact in any product. This article is not a contract of insurance.

Insurance products are underwritten by the respective insurance partners and distributed by iFAST Financial Pte Ltd (“iFAST”). You are advised to review the specific terms, conditions and exclusions in the relevant policy contract.

While iFAST and its third-party providers strive to provide accurate and timely information, there may be inadvertent omissions, inaccuracies, and typographical errors. Opinions expressed herein are subjected to change without notice.

The comparisons and opinions provided are based on publicly available data/information and are intended to provide a general overview of the insurance products discussed. These comparisons do not cover all available products and may not fully illustrate every aspect of the products discussed.

Purchasing a life insurance policy is a long-term commitment, and early termination may involve significant costs. The surrender value, if any, may be zero or less than the total premiums paid.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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