Whole Life vs Universal Life Insurance?

vyshtiaNovember 10, 2006

I'm confused on which to purchase. From what I understand, the Universal Life Insurance is good because it gives you more control of your money but it may cost more.

Can anyone outline the differences? Or make a recommendation?

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term life. you get higher coverages for less money.

    Bookmark   November 10, 2006 at 11:56AM
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I also recommend simple term life. Invest your excess funds elsewhere.
Do some research about life insurance, most people with no financial incentive recommend term. Do not get advice from insurance sales people.

    Bookmark   November 10, 2006 at 12:08PM
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Assuming that the OP has chosen to go with some form of whole life, however, or has "peace-of-mind" reasons for going with whole life, universal whole life is a fairly expensive way of investing. As you would with any other purchase of equities (stocks, bonds, mutual funds, etc.), you need to know how well the money is managed and what kind of expenses they incur in managing your money. High expenses can chew away at even a decent rate of return.

    Bookmark   November 10, 2006 at 12:22PM
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Thank you for the input!

I'm still confused though.

I currently have term life at my work - so I'm covered there. People were still telling me to buy Life Insurance though because it builds equity and after paying into it for a certain number of years, I'll have more in there than I put in and I don't have to pay premiums anymore. It sounded like a good idea the way they said it. LOL

Sounds like Universal Life is out of the question then so I just need to figure out if I should buy Whole Life Insurance.

    Bookmark   November 10, 2006 at 2:02PM
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You have to run the numbers, look at how much a comparable term policy will cost, over the term, take the difference and figure if you invested it at a conservative rate of return, say 4% how much would you have at the end of the term v a whole or universal policy. I would not rely on work because if you lose your job you lose the coverage

Also term is only for a specific term, say 5, 10 or 20 years, then they can either drop you or change your coverage premiums (during the term they can only do ones based on inflation). So the one advantage of whole is that it continues however, I know lots of people that got to a certain age and then ended up redeeming thier policy for the cash value. I think they may have been better off investing the money

Ask a lot of questions and make sure you understand it and also do not forget about tax

    Bookmark   November 11, 2006 at 12:22AM
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The first question to ask yourself is what you need life insurance for in the first place.
If it is for your children that is a good place to start.

The next question to ask yourself is why you would want whole life as opposed to term.
The principle advantage of whole life over term is that you can lock in your insurability.
I can see an advantage in that, if for example you are currently in a low-risk occupation, and you anticipate changing to a high-risk occupation in the future.

Personally I bought a whole life policy in 1969 (I think.) Inflation has since eroded the value of the payoff from several years income to several months income. It did start me setting aside some money on a regular basis, which I doubt that I would have done otherwise at that point in my life. The policy as bought was with a mutual life insurance company. The company converted into a publicly listed company some years ago and I received an unexpected bonus of shares in the company with a value similar to the face value of the policy. The bonus shares are now worth substantially more than the money I anticipate receiving when I reach 65 in 2012.

Would I do things differently now than I did in 1969? Certainly! On the other hand the person I was in 1969 had neither the experience nor the discipline I would like to imagine I have now.

    Bookmark   November 11, 2006 at 3:54AM
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I currently have term life at my work - so I'm covered there.

Well, you're covered as long as you work there, anyway. There may be provisions for allowing you to continue the policy after you leave the company's employ, but whether you can do this (unlikely) or whether it makes economic sense are two different questions. Insurance through work usually ceases to exist if you leave (voluntarily or involuntarily). Just so you realize your exposure...

People were still telling me to buy Life Insurance though because it builds equity and after paying into it for a certain number of years, I'll have more in there than I put in and I don't have to pay premiums anymore.

Non-term insurance will build equity. So will a savings account at your local bank. That doesn't mean either one of them is the best choice for you. It may be helpful to think of a whole-life policy as an enforced savings account. Paying premiums on a regular basis is like having money deposited in a savings account. The key difference is that the life-insurance company is taking money out of your account. That's how you end up not "having to pay premiums" anymore -- you may not write a separate check to the insurance company for a premium, but they are getting paid by taking it out of the interest you earned.

I still think whole-life has a place for some people. But you do need to consider what you need the insurance for and you need to determine your comfort level with saving money versus being pretty-much-guaranteed insurable over the decades.

    Bookmark   November 11, 2006 at 12:01PM
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Whole Life is alot more expensive than term insurance and it's a way for an insurance salesman to sell you more and thus make more commission for him. Below is a link to a Suze Orman article on the subject.

Why don't you just up your term insurance to a higher level rather than spending thousands more on a whole life policy? Term is SO much cheaper than whole or universal.

Here is a link that might be useful: Suze Orman Article

    Bookmark   November 12, 2006 at 5:22AM
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Because term eventually expires, and if you have a poor family medical history or you've acquired a medical condition that will make you difficult/impossible to insure (not hard these days), it can cost way more to buy more term than to have had whole-life back when you were not sick.

Folks also ignore the peace-of-mind aspect of insurance. I know that's overplayed by agents and insurance companies. But we don't come down on people who insist they want to pay off their mortgage to own their house free and clear. Why come down on people who want to know they're insured?

I'm not defending that whole life is cheaper than term. It isn't. But lots of people make lots of investment choices in which they leave money on the table in exchange for not having to worry about it. Whole-life is one of those choices. Choosing it doesn't make one a spendthrift dolt.

    Bookmark   November 13, 2006 at 9:56AM
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Thank you, everyone for your input, this is very helpful.

sparksals - thank you for the link to that article.

I just wanted to make sure that I was at least giving this topic some thought and all of your thoughts have helped a lot! =)

    Bookmark   November 13, 2006 at 10:48AM
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Insurance agents like to refer to the savings value of whole life insurance.

Term insurance is way cheaper in the early years of one's life, when the possibility of death is much lower.

As long as one continues in good health, it increases over the years, as the possibilities of death during that term increase.

And increase rapidly, as the owner ages.

Should s/he become uninsurable, during one of those trems - bad news for renewal ... or if the carrier agrees to renew, the rates will be really high.

In the early years when the major need for insurance exists, as well.

When I as a young father had a wife who was not employed (outside the home, for pay, that is), there was only one income, and I considered it important to provide for my family through many dependent years, were I not there to provide for them.

As I grew older, the children grew and eventually went to post-desondary school education (expensive), then were out on their own.

Wives in similar circumstances can begin to earn employment income, if they choose.

So - if the original breadwinner's support disappears - she can survive on her income, and the kids on theirs.

Thus the need for life insurance has decreased, over the years.

Which is a major reason that many people advise buying term insurance - and investing the substantial difference in price of whole life over term (sometimes three or four times the amount).

But - whole life premiums do not change throughout their period covered, usually the whole of one's life - so there will be a payout at the end (in devalued dollars).
Some say that the extra premiums charged in the early years sort of become like a savings account - that is later drawn on, when the premiums would be much higher, to pay those increased rates.

With regard to making use of the supposed savings in the "cash value", you can have that money back ...

... on condition that you cancel the policy.

The only way in which you can arrange to receive the supposed savings in the cash value, and the benefit in case of your death ...

... is to arrange to be alive and dead at the same time.

Also, with regard to term ...

... how many people do you know who will rigorously invest that amount that they were supposedly saving by buying the term insurance?

Another majore shortcoming of term is that, as mentioned earlier, should you become uninsurable during the term, and wish to rev\new, you have a major problem.


Hope you all have a lovely late fall week.

ole joyful

    Bookmark   November 13, 2006 at 6:22PM
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Term works for most because not everyone needs life insurance "forever". Perhaps only until kids out of college, until retirement, mortgage paid off, etc.

So simple answer is buy term & get level-premium for set years, depending on personal needs (eg, 10, 20 or 30 years).

    Bookmark   November 13, 2006 at 6:45PM
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Whole Life is like a Christmas Club savings account. It's only value for most people is enforced savings. If you have a backbone, you will save without Big Brother.

Many people are insured against the most unlikely events and uninsured against more likely ones. I'm talking about Long Term Care insurance, which companies are eager to sell now because there is a huge Baby Boomer market and BECAUSE THE ODDS ARE SO FAR IN THE COMPANY'S FAVOR! I'm also talking about Disability Insurance -- held by too few workers (and even stay-at-home moms).

If you have dependents I'd buy term life and disability.

    Bookmark   November 14, 2006 at 10:02AM
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Whole life agents also stress the fact that you can borrow against it in an emergency -- for a fee, that is. They basically charge you to borrow your own money.

    Bookmark   November 14, 2006 at 4:59PM
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"I currently have term life at my work - so I'm covered there."

Steve O is absolutely right that it is dangerous to rely too much on company term life insurance. My sister in law almost learned this lesson the very, very hard way.

My husband's brother was diagnosed with lung cancer at age 38 and obviously could no longer work. The company hung with him and continued to pay him his sales commissions from his territory for a couple of months, but when it became clear the treatment was not going to allow him to return fairly quickly, he went on disability.

He died about 8 months after going on disability. After he died, the company that offered life insurance through the company tried to tell my SIL that the policy was invalid because he had been on disability! In fact, the policy did invalidate life insurance after a period of 9 months on disability. The fact that he hadn't been on disability for quite that long (had he lived a week or two longer, he would have been) and the fact that his policy had never formally been canceled before his death allowed her to collect. But it was a battle that took months.

My point is -- unless you have read and understand the policy you have through your employer, assume you are only covered if you drop dead of a heart attack, say, or are hit by a bus. If you are ill for an extended period, you may well lose your coverage, and at that point you will not be able to get ANY more.

We buy the maximum disability and life insurance from my husband's company, but each of us also has a term life policy that will last for 20 years and will be there for us if the worst happens. We each got it before age 35 so it wasn't that expensive. Tobacco users pay a lot more, so in that case it would feel much more like throwing money away.

Until my BIL died, I would never have thought that employer life insurance could be lost if you had to leave work because of illness. That's something they don't tell you during the fall enrollment periods. Not every insurer will be the same of course, but you cannot be too cautious. My SIL was almost left with nothing. As it was, with two little children, what she does have is not enough.

    Bookmark   November 17, 2006 at 10:35AM
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The comments about having "backbone" to save/invest in another way can be solved with an automatic transfer from your checking account (just like another bill) to your investment of choice. I was not good about saving or investing until I got smart about this issue. It's simple to do and I can still be lazy, but not stupid, hehehe.

    Bookmark   November 30, 2006 at 2:26PM
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The value of a whole life insurance policy can not be underestimated. If you knew who was going to be the winner of the 2007 SuperBowl, don't you think you could leverage that knowledge to make yourself a ton of money. Here's the deal, there are only 2 certain events in life: death and taxes. If you knew FOR SURE that you were going to die, wouldn't it be to your advantage to leverage that sure knowledge and provide economic certainty to yourself and your family. Whole life insurance with paid up dividends and a waiver of premium rider for disability is the best way I know of creating certainty in your life.
Visit www.producerrevolution.com for more information! It will rock your world!

    Bookmark   December 16, 2006 at 10:26AM
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Just for fun, I checked one website for term insurance (sbli.com, in case you want to see for yourself). Among their other options, they offer yearly renewable term insurance that will cover you up to age 75 without additional proof of insurability, or you can opt for a level premium policy that will cover you until age 85. So at least for this particular company, joyfulguy's claim that "should you become uninsurable during the term, and wish to renew, you have a major problem" doesn't seem to apply.

Therefore, before considering a whole-life policy, I would want to compare that with the alternative of term insurance and investing the difference in premiums. If someone wants to offer some concrete numbers, perhaps we can come up with some concrete answers :-)

    Bookmark   December 16, 2006 at 4:10PM
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Ya know, DFC, you almost had yourself a decent argument there (not that everyone would agree with you, but you had a point to make and you made it). But you ruined it by spamming us with your "world-rocking" Web link. Thanks for playing....

    Bookmark   December 17, 2006 at 4:47PM
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I also asked about universal life vs. whole life insurance on another site but still no response. Whats the best for single parents?

    Bookmark   August 1, 2008 at 7:40PM
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Depending upon your life situation (if you need insurance at all, some don't), a person should have anywhere from 4 to 7x their annual gross income in total life insurance. Life insurance, BTW, passes tax free to the beneficiary although it is counted in the total value of your estate for federal estate tax purposes. Wealthy people get around this by setting up ILITs (Irrevocable Life Insurance Trusts).

As an Exec Asst for salespeople, I worked at CIGNA insurance for 13 years. I also worked at an independent CFP's office for 18 months, who was both a broker and insurance agent. I would recommend level term insurance - in fact, the CFP I worked for refused to recommend anything else unless the policy was for tax planning purposes, in which case he recommended Universal Life. Annual renewable insurance costs much more over the long run.

Mortality statistics have improved so much that term insurance is quite simply, the most economical choice for just about everyone. And level term insurance means your premium will never change, regardless of your health situation, for the entire period it is in force.

Insurance companies make a lot of money off whole life and even universal life policies. With the decline in the stock market, the advantages of universal life have suffered compared to straight term insurance.

Never underestimate what long-term inflation does to cash values. It hasn't been that long since people thought $50K or $100K was a lot of life insurance - but these days, $100K buys very little if your family is trying to live off of it for the next 15 years, or trying to send two kids to college and grad school.

Pick the longest term that takes you to retirement age. Most people GENERALLY do not need large amounts of insurance after they retire, but YMMV.

Disability insurance, if you are not covered at work, is extremely useful up until the time you retire. But the underwriting standards are extremely strict right now, unlike life insurance underwriting. It is virtually impossible to get a policy for more than 60% of your last two years' income (verified by copies of your tax returns) even if you are in good health.

In contrast, I am a standard risk, NOT preferred. I have $750K of life insurance for less than $80/mo that was purchased a few years ago when I was over 50. One is a 15-yr level term, and the other is a 20-yr level term. I have them for estate planning purposes. If I were to try to purchase whole life or universal life in that amount, the cost would be astronomical.

    Bookmark   August 1, 2008 at 11:50PM
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