Have you ever had anyone ask you which product is better? Universal Life or Whole Life?
I get that question all the time. My answer is usually the same: Neither is better. Each product line offers some outstanding features that can greatly benefit consumers.
Let’s take a few minutes to break down what each product is and where they best fit in a clients’ plan.
Policy Duration
Both products are considered “Permanent”. While either can lapse prior to death under several circumstances, they are generally purchased for Lifetime coverage.
Premiums
Both products will include factors such as Mortality and Expenses into their pricing models.
Whole Life will levelize the expected mortality costs so that you are paying more early on and less later on.
Universal Life will use an increasing Cost of Insurance schedule with the internal invested funds leveraged to pay higher costs later on.
Investment Options
Whole Life will generally include a guaranteed interest rate and credit policy holders on a non-guaranteed basis based on overall carrier performance. This is called the Dividend. There are some Whole Life policies that utilize Variable Accounts, Indexed Accounts, and other methods for crediting policies holders but these are by far the minority.
Universal Life has an array of methods for crediting policy holders.
Current Assumption products will credit interest based on the carrier’s performance. This performance can include anything from the general account, to mortality experience, to other investment holdings the carrier might have.
Secondary Guarantee products usually will not show any cash value, however, they have “Shadow Accounts” that are credited similar to Current Assumption products for Lapse-Protection purposes.
Variable Universal products will offer a dozen to a few dozen Sub-Accounts that are similar to Mutual Funds. The performance of the Sub-Accounts determines the growth of funds inside the policy.
Indexed Universal products have many different interest crediting strategies. At their very core though, they nearly all offer participation in an Index’s gains through the purchase of options. Some stop there, others offer everything from guaranteed interest bonuses to charging additional fees for greater leverage.
Distributions
Paid Up Additions may be surrendered for their cash value, however, the base face amount of a Whole Life policy cannot be reduced. It can only be loaned against.
The base face of a Universal Life policy can be reduced. As such, a client can choose to withdraw as much as they like, loan as much as they like, or use a strategy that includes withdrawals and loans.
Taxes
Generally speaking, both types of policies can be set up to distribute income on a tax-free basis. Client’s should consult with their tax professionals to make sure they are owning, funding, and taking distributions appropriately.
Riders/Features/Etc.
Whole Life and Universal offer dozens of different riders depending on the carrier and product. Some carriers have riders that sound identical but operate differently. Take Waiver of Premium for instance. Some carriers will waive the entire billed premium, other will only waive the Cost of Insurance, others may choose a different amount to waive.
So, instead of asking which type of policy is best, challenge us to help you to find which type of policy fits each of your clients’ needs best.
