- premiums are allocated by the insurer
- the insurer calculates the death benefit
- cash values accumulate
- the policy supports guarantees relating to premiums, death benefit, and cash values.
Whole Life Insurance
Whole life insurance has been a part of the financial framework of America for over 150 years. It is the foundational product for the entire life insurance industry. Whole life insurance has weathered a thirty-year onslaught from the investment community only to re-emerge in the early 21st century more powerful and appropriate than ever.
Individual Americans and every conceivable American business rely on the power, flexibility, and versatility of whole life insurance especially participating whole life insurance to guarantee that they can...
- finance major purchases without going to the bank
- reduce and eliminate debt to banks, credit cards, charge cards, auto loans, etc.
- secure a tax free retirement income they don’t have to work for and can’t outlive
- grow tax free savings to handle everyday emergencies
- support and improve their balance sheets
- create wealth and wisdom to pay forward to those they care most about.
A basic whole life insurance contract guarantees that the premium and death benefit remain level for as long as the insured person keeps the policy in force by paying the guaranteed level premium. Moreover, the whole life contract guarantees that cash values accumulate in the policy at a guaranteed rate and that only the policy owner - not the insurer - can access these guaranteed cash values.
One more thing, cash value accumulations in whole life contracts cannot go down unless the policy owner acts to surrender all or part of them in accordance with the terms of the contract.
In addition, participating whole life policies pay tax-free dividends. These dividends can be...
- taken in cash
- left to accumulate at a guaranteed interest rate - the interest is taxable
- used to purchase additional death benefit without proving good health...
- as term insurance
- as additional amounts of paid-up whole life insurance, which in turn accumulate their own guaranteed cash values and pay their own tax free dividends - this is the preferred option
Finally, 21st century participating whole life insurance policies offer optional riders that provide additional power, flexibility, and versatility. These riders may not be duplicated or replicated in any other mutation of the basic life insurance contract.
A properly designed and executed whole life insurance program assures the policy owner that - no matter what surprises life delivers - the policy owner can keep a whole life policy in force, access all if its living benefits, never lose a penny in the policy, and deliver a legacy of both wealth and wisdom to the policy owners named beneficiaries.
Universal Life Insurance
EF Hutton - a defunct investment company - created the first Universal life insurance policies just thirty-one years ago in 1979. EF Hutton designed these policies to compete with the well-established participating whole life insurance policies that dominated the market at that time.
The major difference between Universal Life Insurance - we’ll call it UL - and whole life insurance relates to the guarantees offered by each.
UL policies unbundled whole life insurance and modified the guarantees in the process...
- UL policies guarantee the charges the insurance company collects from the premium paid by the policy owner...
- for mortality, which is the cost the insurer incurs to guarantee the death benefit
- for the expenses the insurer incurs issuing, managing and maintaining the policy
- the insurer guarantees that both of these charges will not exceed an amount - specified in the policy - that is normally higher than the current rate the insurer charges and illustrates
- UL policies also guarantee to pay a minimal rate of return on any accumulated cash value in the policy. This rate may result from...
- a simple interest calculation
- a link to an index such as the Standard & Poor's 500-Indexed UL
- the performance of underlying investments chosen by the policy owner-Variable UL
- However, the insurer does not guarantee that there will be any accumulated cash value in the policy as the charges mentioned above or poor performance of the insurer, the index, or the underlying investments may erode the accumulations or even reduce them to zero. If that occurs, the insured must decide to pay more premiums into the policy or allow it to lapse with no value.
- Some UL policies have a secondary guarantee. This guarantees that the policy owner’s named beneficiaries will receive the original death benefit regardless of the cash value accumulations or the insurer’s costs as long as the policy owner continues to pay a specified premium
UL has some options that attempt to replicate the features of whole life insurance
- In order to compete with the paid-up additions option and riders available on whole life insurance that allow the policy owner to add death benefit regardless of health, UL policies offer
- an option, available at time of application, to receive a death benefit equal to the amount applied for plus an amount equal to accumulated cash values if there are any
- the ability to add additional death benefit to an existing UL policy by paying additional premium and proving good health
- some newer policies also offer other innovative ways to increase the death benefit
- UL policies allow policy owners to reduce the death benefit and/or premium on existing policies without having to issue a new policy. Whole life insurance policies allow policy owners to surrender portions of their death benefit and accumulated cash values without surrendering the entire policy
- UL policies also allow policy owners to vary their premium payments from month to month with a greater degree of flexibility than whole life insurance plans
Both Universal Life Insurance and Whole Life Insurance provide benefits and options that are unique and beneficial depending on your needs. Your best choice will become clear by consulting with a qualified insurance and financial advisor that understands and appreciates both kinds of policies.