Whole vs Universal

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Spaceman Spiff's picture
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Joined: 2006-08-08

I've got some CE that I've got to do, so I decided to do one on Financial Planning with Insurance.  I got to the permanent policy section and got a review of Whole vs Universal.  The course doesn't give an opinion on which is better, just that they exist and how they work.  ALL of the permanent policies I've done have been Universal.  However, I know that I have some clients with Whole Life policies.   Most of them have tons of cash value and they aren't paying the premiums because of the dividends.  The hypos I've run tell me that Universal gives a bigger DB, but doesn't build a ton of cash value.  Just the opposite with Whole Life. 
Is it a matter of one being better than the other or is it a client preference issue?  Which do you guys prefer?

deekay's picture
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Joined: 2007-05-15

It's good you're looking at what to use and when.  Most advisors I see gravitate towards one over the other and be pretty dogmatic when they do.  What kinds of situations are you recommending permanent insurance?  That would give us a better idea of what to use and when.

B24's picture
B24
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Joined: 2008-07-08

Spiff,
 
The answer really is, it all depends.  Whole life, IMHO has a little more flexibility in terms of what to do with the dividends.  You can build up more death benefit, you can build up cash, you can take the income, you can allow the divs to pay the premiums.  I have found them very effective when bought at a young age and use the divs to buy paid up additions.  But that's just one example.   
 
I am not a huge fan of universal, although it can have its place.  I find it useful for estate planning purposes for older people, or for younger people with large incomes and known future potential estate issues.  In these cases, you can split universal and term.  The term dies off when the kids are out of the house, and the universal keeps going.  The other case would be if you are simply buying death benefit at a really young age.  Let's say you start having kids at 23 and want coverage throughout their childhood (and you might have more kids).  Doesn't usually make sense to buy 20+ year term insurance.  If you are going to need DB for 25+ years, universal will get you more coverage for less dollars than WL.

Spaceman Spiff's picture
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Joined: 2006-08-08

I'd say the situations I'm using them in would be fairly typical.  Similar to what B24 said.  Estate planning for older clients, second to die policies, things like that.  Very generic stuff.   For instance - I have a client who is simply looking to pass on the most money she can to her kids.  She's 72 and has about $500K in funds to work with.  She doesn't need the money for income.  We've taken care of LTC.  She hates the volatility of the market, but would love to pass more money on.  We've talked about insurance and she likes the idea of the leverage.  
My understanding from the hypos, as I mentioned before, is that UL gives her more DB, but the WL builds up cash value faster.  In theory she could eventually stop paying premiums on the WL because of the dividends.  She'd have to pay for the UL for the rest of her life unless she did a big single pay policy. 
 
I'd lean towards the UL for her, based on her goals.  Is there something I'm missing with WL that I should be paying attention to? 

Full Throttle's picture
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Joined: 2008-08-26

Estate planning for older clients, second to die policies, things like that.  Very generic stuff.   For instance - I have a client who is simply looking to pass on the most money she can to her kids.  She's 72 and has about $500K in funds to work with.  She doesn't need the money for income.

 
This is generic advice, so treat it accordingly.  In general, here is how I typically advice my clients:
 
Below age 55 (or so), likes the idea of leaving some money behind, but not sure what their future retirement situation will look like yet:  whole life.
 
Situation like you mentioned above: older client, desire to leave max amount, access to cash doesn't matter: a UL policy with a NLG rider (no lapse guarantee).  Minimum funding for max death benefit. 
 
If the client was younger, a WL policy with the dividiends going to PUA may eventually catch-up to the UL NLG policy death benefit and give the client more options later on.  However, an older client doesn't have the luxury of time.

B24's picture
B24
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Joined: 2008-07-08

Spaceman Spiff wrote:
I'd say the situations I'm using them in would be fairly typical.  Similar to what B24 said.  Estate planning for older clients, second to die policies, things like that.  Very generic stuff.   For instance - I have a client who is simply looking to pass on the most money she can to her kids.  She's 72 and has about $500K in funds to work with.  She doesn't need the money for income.  We've taken care of LTC.  She hates the volatility of the market, but would love to pass more money on.  We've talked about insurance and she likes the idea of the leverage.  
My understanding from the hypos, as I mentioned before, is that UL gives her more DB, but the WL builds up cash value faster.  In theory she could eventually stop paying premiums on the WL because of the dividends.  She'd have to pay for the UL for the rest of her life unless she did a big single pay policy. 
 
I'd lean towards the UL for her, based on her goals.  Is there something I'm missing with WL that I should be paying attention to? 
 
UL is the obvious choice here.  She can buy a pretty nice estate for her kids with what she has.  Take the 500K, buy muni's at 4 - 4.5%, use the 20K divs to buy life insurance.  Tax efficient, relatively safe, gets to keep her principle for a rainy day. 

deekay's picture
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Joined: 2007-05-15

Good idea, B.  An alternative could be a SPIA for $500k, let her keep the difference between 4.5% and whatever the SPIA pays, fund the policy guaranteed, and Spiff makes a nice chunk of money.

B24's picture
B24
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Deekay, I was going to throw in the SPIA idea, but then she loses control of the entire amount, which I am not a fan of.  However, if she had $2mm, and wanted to leverage $500K for say, a $2mm policy or something, then I think a SPIA might be a good option.  But even when people say they "never" need the money, if that's their only money, I don't like to lock it up.  I find most people end up needing a lump sum at some point...."yeah, my SS and pension are more than enough to cover my expenses".  They claim to never need a new roof,  a new car, a big trip, whatever.  I just assumed this was her only cash stash.  If she has other assets, then a SPIA could work.

deekay's picture
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Joined: 2007-05-15

At that age, she may not need to annuitize the whole $500k to get the income needed to pay the premiums.  I'm guessing she'll get about $40k per year off $500k, so she may only need to annuitize $250k or so to get $20k.  Just a thought.

GeodePhilip's picture
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Joined: 2010-06-02

Hello Spiff,Both whole life insurance and universal life insurance are considered permanent types of life insurance coverage. Both of them have some unique features and benefits that you should be aware of, And choosing both of them is totally depend on the costumer with his/her requirements.Here is some information about whole life insurance and universal life insurance.

  1. 1- With whole life insurance, you are going to make the same premium payment over a long period of time. But With universal life insurance, you have much more flexibility with your payments.
  2. 2- With whole life insurance, you are going to have a fixed death benefit. But With a universal life insurance policy, your death benefit can fluctuate.
  3. 3- With whole life insurance, a certain part of each premium payment will go towards funding a cash account. With the universal life insurance policy, you will also be building up a cash amount.

 

Ted's picture
Ted
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Joined: 2010-04-07

All three of the previous posters statements are so far from being correct, just disregard the post in it's entirety.

Spaceman Spiff's picture
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Joined: 2006-08-08

Perhaps you should, instead of just making a drive by comment on their accuracy, give me your version of the truth. 

Ted's picture
Ted
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Joined: 2010-04-07
  • 1- With whole life insurance, you are going to make the same premium payment over a long period of time. But With universal life insurance, you have much more flexibility with your payments.
  • There's an element of truth in this statement, but in the real world, usually isn't correct:Univeral life - you have flexability in the premiums paid, but the not the mortality cost that comes due.  Example, I have my mortage payment EFT'd out of a checking account with $3,500 in it.  I can skip a deposit into my checking account for a month or two and my mortage will be paid, but that "flexability" only lasts so long before I get behind.  Now, unlike my mortage payment example, the cost of insurance cost rapidly increases as you get older.  If you utilize the "flexability" at the front end and don't take advantage of the time value of money, good luck catching up.Whole life - contractually there may be a guaranteed level premium, but in the real world, most people buy whole life from quality participating carriers (dividend paying).  Over time, one has the ability to have their premiums off-set by the dividiends created (guaranteed, no, but if structured correctly, very likely).  Whole life can also be structured with "flexability" in payments utilizing a PUA rider.

  • 2- With whole life insurance, you are going to have a fixed death benefit. But With a universal life insurance policy, your death benefit can fluctuate.
  • Both can have a fluctuating death benefit.  Again, if utilizing a participating carrier for whole life and a PUA's option for the dividiends, the WL death benefit will likely grow each year.  UL, not necessarily unless set up to specifically do this as the cash value grows (death benefit option #2).  Over time, a UL death benefit may increase automatically as the cash value grows to avoid a MEC contract, but not in the short run.

  • 3- With whole life insurance, a certain part of each premium payment will go towards funding a cash account. With the universal life insurance policy, you will also be building up a cash amount.
  • If he's saying that both will have a cash surrender value if the policy is forfeited, then yes, both have this option.  There is no cash account on either.Is that better? 

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