IUL 101 - Part D - IUL vs. Buy Term and Invest the Difference

We have showed the pros and cons of IUL so far, now we will take a look at the common argument against IUL: Buy Term and Invest the Difference.

The best way to compare two options is to use the numbers to illustrate.  

Here is a typical case:

• Male age 35, best health class
  
• Every month after paying all the expenses and savings, has $1,000 money left to invest
  
• Needs $1,000,000 life insurance coverage
  
• Plans to retire at age 65
  

Option 1. Buy Term and Invest the Difference

• 30-year $1,000,000 Term life annual premium: $815
  
• Annual investment amount: $1000*12-$815=$11,185
  
• Average fund expense ratio: 0.5%
  
• Average annual fund’s before expense return: 8%
  
• Investment horizon: 30 years
  
• Total principal contribution: $346,735
  
• Balance at age 65: $1,348,530 (pre-tax)
  
• Capital tax rate (Federal plus state): 20%
  
• After-tax balance: $1,148,171
  

Option 2. Buy IUL

• Annual premium contribution: $12,000
  
• Insurance face amount: $1,000,000
  
• Average annual return: 6%
  
• Cash value at age 65: $799,901
  

Conclusion
Buy Term and Invest the Difference is better because it yields higher after-tax balance at the retirement age 65.

For a long time, I belong to the Buy Term and Invest the Difference camp too, driven by the above analysis.  However, I didn't realize two major flaws associated with the above comparisons, I will discuss the in the next blog post.