Once you’ve decided that permanent life insurance coverage is the solution for you, the first issue to sort out is which type of policy is best — whole life or universal life. From there, you can dive into specific variations of each policy that meet your needs.
As with most personal planning issues, it’s not that one type of policy is good and the other is bad, but they are different, and what works for one person may not work for another. So let’s dig deeper into the basic traits of each type so you can better understand which policy might be best for you.
Whole Life Insurance
Whole life insurance policies are designed to provide insurance coverage for the entire life of the insured. It does not run out at a certain age like term policies do. The most traditional form of whole life coverage provides for a level premium (the same amount every year) and a level death benefit.
For example, if a 40-year-old wants $1 million of coverage, the insurance company would quote a premium based on his or her health. If the premium came out to $3,000 per year, that premium would be paid each year for the rest of the insured’s lifetime (or until the policy matures, which is usually at age 100). When the insured passes away, the beneficiaries would receive the $1 million payment.
Whole life, like other forms of insurance, can be used for income replacement, estate liquidity, business succession planning, and a variety of other needs. The primary advantage of whole life is that the premium and death benefit amounts are fixed and certain. You also have guaranteed floors on interest rate crediting and ceilings on expenses charged by the insurer.
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Many people also appreciate that whole life policies have no tie to the stock market, eliminating market and volatility risk. Cash value accumulates only based on the increased tabular value of the policy and any dividends and interest that may be credited to the policy.
Universal Life Insurance
The primary difference between whole life insurance and universal life insurance is that universal life offers flexibility in the premium payments and the duration of coverage. Assuming your universal life policy has enough cash value to cover the cost of insurance, you can modify your premiums by paying more or less than your scheduled payment. You may even be able to completely skip payments.
When universal policies are established, you are given a target premium based on assumptions, including the cost of insurance and interest rate crediting. Your minimum payment to keep the policy in force is often less than the target payment. You’ll want to be very cautious, though, if you choose to reduce your payments because you don’t want to risk your policy lapsing in the future. The way to stay ahead of this risk is to assess your policy performance each year or every couple of years with a professional.
Another related benefit of universal policies is the ability to adjust the overall death benefit amount, and duration and the corresponding premium payments. Let’s say a situation comes about in which you can’t afford your premium and your policy has limited value. Rather than surrendering your policy, you can simply cut the death benefit in half, which would dramatically reduce your premiums.
On the flip side, if you need to double your insurance coverage, this type of policy will allow that, assuming your health hasn’t declined to a point where you become ineligible for more insurance. You can program the insurance coverage to last through a specified age and then extend coverage beyond that based on life expectancy by paying more premium in the future. In this manner, you can pay less premium than would otherwise be required since you would only pay for insurance coverage to an anticipated age or life expectancy. This “life expectancy” approach is a big advantage of universal life coverage and offers premium flexibility that whole life does not.
The Bottom Line: Which Is Best?
The right type of life insurance for you will hinge on your specific needs and what you can afford. Some people appreciate the basic and straightforward nature of whole life policies. Others are attracted to the flexibility offered by universal policies, which can be enormously helpful in terms of adapting to the changing needs of policy owners.
The right move is often to price out several policies and compare them side by side. At Howard Kaye, we are experts at reviewing existing coverage and establishing new policies to meet your goals. Our extensive experience in this industry gives us a breadth of knowledge that allows us to understand your specific needs and formulate a custom insurance solution for you. Contact us today at 800-DIE-RICH and let’s get started.
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