Branch Owner, TWFG Insurance Services, Fremont California and the Greater Bay Area Representing Dozens of Insurance Carriers
Whole life polices run for your whole life. Now this may not be exactly correct as there really is a cut off which varies by company. Say up to 120 years old. However this is much different then term polices that are for a specific term which could be 10-30 years and then run out. After the term is run out you have to re-qualify should you wish to continue with life insurance The advantage of whole life or universal life is that you qualify at the age you sign up and the rate for the most part never changes. So in the end whole life can actually be less if you keep the policy for the long run. Also some polices have a cash value. All these details need to be gone over with an agent to determine what your actual need is.
Co-Founder, Coastal Financial Partners Group, California
Another way to look at the issue of whole life's apparent high premium is to examine the difference between whole life, or any permanent (cash value) life policy, and term.
Consider the purpose of the cash value. Cash value is representative of the policy reserves the insurance company establishes with the premiums they collect to pay claims. The premium on cash value policies is higher in the early years than what is needed to pay claims so it adds to the reserves for later when the premiums are less than the pure cost of insurance later in life and claims increase.
In simplified terms, as one approaches age 100, the cost for term coverage at that age is prohibitive (effectively $1,000 per $1,000 of death benefit) yet the level annual premium on the permanent policy purchased many years before is unchanged.
The premium you pay for permanent life insurance ensures coverage cannot be outlived like term insurance which almost always expires before you do.
Whole life insurance is designed so that the premiums never go up and you will have coverage until you die, whatever the age may be. As a result the premiums are based on life expectancy and evened out over that period of time. You pay more in the early years but in later years you actually pay less than term. The excess in the early years is what helps build cash value. Term insurance generally will go up after each term period to the point where in later years it becomes unaffordable It depends upon the reason for the insurance as to which is the better option. Temporary needs are best addressed with term, while permanent needs are best addressed with whole life.
A simple answer: Whole Life you are guaranteeing the premium/death benefit & the cash value.
Universal Life, you can guarantee the premium/death benefit but not the cash value.
Term of course has not cash value unless you are talking about a Return of Premium policy.
With Whole Life you can see in the future what exactly the cash value will be. With the Universal Life, you can get a projection of what it will be.
Generally speaking, Whole Life is 20-40% more expensive than Universal depending on your age and health status.
Specialist, LTCi, DI, Annuities, Life, Designs In Life, LLC, Utah
Whole Life (AKA, Ordinary Life) is more expensive because the insurance company is accepting a higher risk to provide the guarantees of contract.
There are primarily two types of whole life contracts that guarantee both the face amount (death benefit) to the beneficiary and the internal tax-favored build up of cash values.
Participating whole life offers the insured the opportunity to "participate" in the financial success of the underwriting carrier by providing the possibility of receiving a dividend at the end of each policy year. Dividends are not guaranteed and while they are presented as a percent (example: 5.2% credited dividend rate), they are not the same as simple interest. It involves a formula that takes into account the cash values in the in force policy along with the investment returns and claims experience of the insurance company in any given year. The policy owner can direct the company to use the dividend in any one of four to six ways, depending on the carrier. All but one of those options will not produce an income tax event. (Taking the dividend as cash, however, will.) Most whole life policyowners either choose to have the dividend purchase paid up additions of insurance (increasing the death benefit as well as the cash value of the policy) or to reduce premium with excess to purchase paid up additions.
Non-participating whole life or interest-sensitive whole life does not pay a dividend. But, it most likely does provide some level of a guaranteed death benefit and guaranteed cash values.
Some whole life policies now provide the opportunity to over-pay the guaranteed level premium for a period of time to “turbo-charge” the growth of the cash value which grows tax-deferred. This requires the addition of a paid-up additions rider (PUAR) and there are limitations on how much over-payment one can make. This capability has been touted by some financial planners as a way of being your own bank because access to and repayment of cash value loans are tax-favored. One avoids a lengthy wait for approval that a bank would need to approve a loan, as well. (Go to Amazon.com and search "be your own bank" for more details.)
In the current unstable economic environment we are in, whole life has experienced a comeback in sales due to the safety and security of this type of insurance contract with tax-deferred inside build up of cash values producing rates of return higher than other fixed interest financial vehicles. However, some analysts minimize those perceived advantages because historically market returns exceed cash value build up, and there can be dire consequences to the policy if cash values are not managed prudently. Reckless use of taking loans can result in the death benefit being greatly reduced or cause the policy to lapse with little or no value.
Whole life is not suitable in all circumstances calling for the application of a life insurance policy. Those seeking direction and guidance should consult with an experienced insurance professional or knowledgeable Certified Financial Planner or other advising professional before purchasing any life insurance contract.
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Consider the purpose of the cash value. Cash value is representative of the policy reserves the insurance company establishes with the premiums they collect to pay claims. The premium on cash value policies is higher in the early years than what is needed to pay claims so it adds to the reserves for later when the premiums are less than the pure cost of insurance later in life and claims increase.
In simplified terms, as one approaches age 100, the cost for term coverage at that age is prohibitive (effectively $1,000 per $1,000 of death benefit) yet the level annual premium on the permanent policy purchased many years before is unchanged.
The premium you pay for permanent life insurance ensures coverage cannot be outlived like term insurance which almost always expires before you do.
Universal Life, you can guarantee the premium/death benefit but not the cash value.
Term of course has not cash value unless you are talking about a Return of Premium policy.
With Whole Life you can see in the future what exactly the cash value will be. With the Universal Life, you can get a projection of what it will be.
Generally speaking, Whole Life is 20-40% more expensive than Universal depending on your age and health status.
There are primarily two types of whole life contracts that guarantee both the face amount (death benefit) to the beneficiary and the internal tax-favored build up of cash values.
Participating whole life offers the insured the opportunity to "participate" in the financial success of the underwriting carrier by providing the possibility of receiving a dividend at the end of each policy year. Dividends are not guaranteed and while they are presented as a percent (example: 5.2% credited dividend rate), they are not the same as simple interest. It involves a formula that takes into account the cash values in the in force policy along with the investment returns and claims experience of the insurance company in any given year. The policy owner can direct the company to use the dividend in any one of four to six ways, depending on the carrier. All but one of those options will not produce an income tax event. (Taking the dividend as cash, however, will.) Most whole life policyowners either choose to have the dividend purchase paid up additions of insurance (increasing the death benefit as well as the cash value of the policy) or to reduce premium with excess to purchase paid up additions.
Non-participating whole life or interest-sensitive whole life does not pay a dividend. But, it most likely does provide some level of a guaranteed death benefit and guaranteed cash values.
Some whole life policies now provide the opportunity to over-pay the guaranteed level premium for a period of time to “turbo-charge” the growth of the cash value which grows tax-deferred. This requires the addition of a paid-up additions rider (PUAR) and there are limitations on how much over-payment one can make. This capability has been touted by some financial planners as a way of being your own bank because access to and repayment of cash value loans are tax-favored. One avoids a lengthy wait for approval that a bank would need to approve a loan, as well. (Go to Amazon.com and search "be your own bank" for more details.)
In the current unstable economic environment we are in, whole life has experienced a comeback in sales due to the safety and security of this type of insurance contract with tax-deferred inside build up of cash values producing rates of return higher than other fixed interest financial vehicles. However, some analysts minimize those perceived advantages because historically market returns exceed cash value build up, and there can be dire consequences to the policy if cash values are not managed prudently. Reckless use of taking loans can result in the death benefit being greatly reduced or cause the policy to lapse with little or no value.
Whole life is not suitable in all circumstances calling for the application of a life insurance policy. Those seeking direction and guidance should consult with an experienced insurance professional or knowledgeable Certified Financial Planner or other advising professional before purchasing any life insurance contract.