Help Differentiate Between Whole Life & Universal Life

[squeed]

Whole Life and Universal Life both seem very similar to me and I'm having a hard time telling the two apart. They both have cash values, both have investment options, what is the difference between these two types of policies ?

-S

 

[souldeux]

Whole life has a load more guarantees on it. The death benefit, cash value, and premiums - guaranteed. It's a very, very stable and unexciting product (and unexciting is, in my opinion, a great thing when it comes to life insurance).

UL policies are a little more thrilling. Honestly, the wiki article sums up UL better than I'd be able to myself, so allow me to quote:

"Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. There are several types of universal life insurance policies which include "interest sensitive" (also known as "traditional fixed universal life insurance"), variable universal life insurance, and equity indexed universal life insurance.

A universal life insurance policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy (credited) on the account at a rate specified by the company. Mortality charges and administrative costs are then charged against (reduce) the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.

With all life insurance, there are basically two functions that make it work. There's a mortality function and a cash function. The mortality function would be the classical notion of pooling risk where the premiums paid by everybody else would cover the death benefit for the one or two who will die for a given period of time. The cash function inherent in all life insurance says that if a person is to reach age 95 to 100 (the age varies depending on state and company), then the policy matures and endows the face value of the policy.
Actuarially, it is reasoned that out of a group of 1000 people, if even 10 of them live to age 95, then the mortality function alone will not be able to cover the cash function. So in order to cover the cash function, a minimum rate of investment return on the premiums will be required in the event that a policy matures.

Universal life insurance addresses the perceived disadvantages of whole life. Premiums are flexible. Depending on how interest is credited, the internal rate of return can be higher because it moves with prevailing interest rates (interest-sensitive) or the financial markets (Equity Indexed Universal Life and Variable Universal Life). Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. And universal life has a more flexible death benefit because the owner can select one of two death benefit options, Option A and Option B.

Option A pays the face amount at death as it's designed to have the cash value equal the death benefit at maturity (usually at age 95 or 100). With each premium payment, the policy owner is reducing the cost of insurance until the cash value reaches the face amount upon maturity.

Option B pays the face amount plus the cash value, as it's designed to increase the net death benefit as cash values accumulate. Option B offers the benefit of an increasing death benefit every year that the policy stays in force. The drawback to option B is that because the cash value is accumulated "on top of" the death benefit, the cost of insurance never decreases as premium payments are made. Thus, as the insured gets older, the policy owner is faced with an ever increasing cost of insurance (it costs more money to provide the same initial face amount of insurance as the insured gets older)."

So: UL has better returns, more flexibility in premium payments due to the greater involvement of the cash value of the policy, and is generally much cheaper than whole life. However, UL is more prone to lapsing due to missed payments - miss or be late on one, and everything gets nuts.

Personal opinion time: I don't present UL to a client as an option until I'm absolutely certain that they're not a lazy nutjob or a total moron, because if they don't have their head screwed on right towards the end and start getting behind on their premiums, that protection isn't going to be there when they need it.

 

[briko3]

If they sign up for autopay, I don't see why you wouldn't want to go with the UL.

 

[Newby]

Think of it this way.

Whole-life is you building a savings account (the cash value account) to become self insured. While you are building the account, you have insurance coverage covering the portion that you haven't got in your savings account yet.

For instance, when you start a $50,000 policy you have $50,000 of insurance and zero in your cash account. when you are 20-years in you may have $16,000 in your cash account and $34,000 of insurance coverage making your total death benefit still $50,000.

When you are 30-years in you may have 41,000 in your cash account and $9,000 of insurance for a total of $50,000 death benefit.

At age 100 you will always have the full amount in your savings account and zero insurance and that is why they mail you a check on your 100th birthday just like you died.

The safety of whole-life comes from the cash account. If someone pays late or even misses payments, the policy won't lapse. It will just borrow the payment from the cash account. When a policy is older, it would take years of non-payment to completely lapse the policy.

Universal Life has several different forms for various uses but the one that is most comparable to whole-life is the "no-lapse universal life or "guaranteed" UL.

With no-lapse UL you are NOT building a cash account to become self insured. You basically have term insurance that is priced to be level to your age 120. Just like 30-year term costs much more than 10-year term, the age 120 UL will cost more than 30-year term.

It builds whatever minimal cash value the insurance company determines they need to keep the policy in force to age 120.

In theory it is a great product for people who only want a death benefit and want it as long as they live. The only problem comes from the lack of excess cash value buildup makes it VERY unforgiving. You can not ever make late payments or miss payments during your lifetime.

If you have a minimally funded no lapse UL and mess up your guarantee, you will have nothing better than a VERY expensive term policy.

I highly recommend whole-life over UL to my clients. BUT if someone wants no-lapse UL I will sell it to them. I WILL recommend that they overfund it (make larger than minimum payments.)

If you completely trust an auto-bank draft to keep your client's UL policy paid on time, you probably haven't been an agent very long.

Here are things that can happen in the real world:

1. The bank just screws up the account and doesn't draft
2. The client changes banks and forgets to change this payment until they are late
3. low funds in the account
4. Paycheck doesn't get deposited correctly bouncing checks
5. Identity theft wipes out the account
6. Client gets sloppy with his bills when he starts getting Alzheimers and doesn't have enough in account.
7. Client thinks it is similar to whole-life and borrows against the policy
8. Child takes over the parent's bills when the parent is in a nursing home and doesn't pay bills they don't understand until an accountant or attorney advises them
9. Client spends down money to qualify for Medicaid and no money is in the account.

The bottom line is: No lapse UL is a great product in theory but in reality has a VERY high lapse rate when compared to traditional whole-life. This is all my opinion from the experiences I've witnessed. You should do your own research. Call your own state insurance commissioner's office and ask them what their history is on the product.

UL has a place and is useful in the RIGHT situations. But it is NOT as good of a product as traditional whole-life for lifelong straight insurance protection for your clients. That's my opinion and I'm sticking to it.

 

[Guest]

If you completely trust an auto-bank draft to keep your client's UL policy paid on time, you probably haven't been an agent very long.

Great post. What actually happens if a client is 30 days late with a monthly payment or a yearly payment. Surely there is a way to make up the payment?

When you say "missed payments" how do you define that in terms of UL?

Thanks.

 

[briko3]

Here's another thought for guaranteed UL. If you want permanent coverage on a budget that usually means that you will end up in a medaid nursing home if you need care later in life. Cash value in a whole life policy is subject to paydown in order to qualify for medicaid. Guaranteed UL, however, doesn't have (or has minimal) cash value in later years. So in that situation (which happens more than you might think), it is actually LESS likely to lapse.

That is of course assuming that the face amount is over $10,000. Then it would be exempt.

 

[bobson]

So: UL has better returns, more flexibility in premium payments due to the greater involvement of the cash value of the policy, and is generally much cheaper than whole life. However, UL is more prone to lapsing due to missed payments - miss or be late on one, and everything gets nuts.

UL has 'potential' for better returns it also has the 'potential' for worse returns. Don't get a newby thinking UL guarentees better returns.

 

[maksim]

I only use no lapse guranteed no cash value ul.

guaranteed till 120. or use term.

I came over from a wirehouse, after working at an insurance house.... and what gets me most, is insurance agents selling whole life as the holy grail retirement plan.

 

[xrac]

Great post. What actually happens if a client is 30 days late with a monthly payment or a yearly payment. Surely there is a way to make up the payment?

When you say "missed payments" how do you define that in terms of UL?

Thanks.

Al, we agree. Newby gave us a great post.

 

[VolAgent]

As opposed to what, the holy grail diversified portfolio plan that just destroyed a generation's retirement plans? Or the holy grail mutual funds plan that has scared another generation out of the market?

I'm not saying that whole life is the end all and be all, and that it should be a person's entire retirement plan. But it certainly seems to perform a lot better and is much safer than many of the investments pitched by Wall Street.

I only use no lapse guranteed no cash value ul.

guaranteed till 120. or use term.

I came over from a wirehouse, after working at an insurance house.... and what gets me most, is insurance agents selling whole life as the holy grail retirement plan.