Whole Life vs Universal Life.. help

[Colie06]

Hello out there. So I have read all I can and watch YouTube videos on the difference between the two, But if someone can break it down for me in layman's terms that would be great. I cant seem to grasp the major differences in a way to simply explain it to someone when they are inquiring.
A potential client asked me yesterday if when he gets a policy can he borrow against the interest. I asked him does he mean borrow against the policy by using the cash value accrued, He said No that's not what he's looking for.. At that point I wasn't sure what to say and told him Id get back to him..

How do I answer this for clients going forward so I'm not looking as stupid as I feel.
Also, if anyone is selling Universal Life who are yall using?

 

[DHK]

A potential client asked me yesterday if when he gets a policy can he borrow against the interest.

I have no idea what that could mean. It doesn't make sense to me.

I asked him does he mean borrow against the policy by using the cash value accrued, He said No that's not what he's looking for.

Did you ask him what he's looking for so he could describe it to you?

Most people don't have a solid understanding of life insurance - regardless of whole life vs universal life - so don't be afraid to offer clarity where there is confusion, as long as you can bring clarity to the topic.

Whole life is a guaranteed cash value policy:
- Guaranteed premiums
- Guaranteed death benefits
- Guaranteed cash values
- Participates with the insurance company's profitability through receiving annual dividends (the only non-guaranteed element).

Universal Life is a flexible cash value policy:
- Flexible premiums
- Flexible/adjustable death benefits (can increase with medical underwriting)
- Flexible/adjustable cash values
- Earns interest or indexed-interest credits (if IUL) through current assumptions on the prevailing interest rate environment and using stock market call options on the general investment account.

That flexibility has a cost. And if the policy isn't structured responsibly, those costs can grow prohibitively expensive - as we've seen in the news with many insurers increasing the costs of insurance on these policies. Most agents say that "it's a side fund with ART or annually renewable term insurance". They're not wrong, but you do need to look at the total death benefit, cash values, and earnings to get an idea of how sustainable the policy can be. If the original illustrations showed an ongoing 9% per year... we already know that was an unsustainable assumption for that policy.

David Kinder Insurance and Financial Solutions | Riverside, CA

To understand indexed interest on an insurance contract, my blog article may be helpful:
David Kinder Insurance and Financial Solutions | Riverside, CA

Now, there are variations on UL. The most common would be Non-lapse Guaranteed UL isn't bought for cash values, but it is essentially a "permanent term" until a given age or policy year - as long as premium payments are made on time every year.

You can "simulate" the whole life guarantees in a UL or IUL policy depending on how you structure the policy. Typically, it's a minimum death benefit for a given period, with death benefit option B through the premium paying years, then you switch to death benefit option A.

There is a formula to help people (and agents) to understand how life insurance is structured:
Net death benefit = cash values + net amount at risk - any outstanding loans

When you can understand and explain the economics within a life insurance contract, you can bring greater clarity and help extinguish inaccuracies, like "the insurance company keeps the cash values when I die".

David Kinder Insurance and Financial Solutions | Riverside, CA

I hope this helps.

 

[jonathan b]

easiest way to explain. A whole life policy is set for level premiums. A universal life is a term sort of with flexible premiums. So if the real cost of the insurance is 200 but you are putting in 500. The 300 difference goes into a bank. Now when you get in your older years that premium you are paying is still 500 . But what the premiums should be is 800 they take out the extra money out of the cash buildup. If a person borrows money from a whole life or limited pay... No problem because the company will take from values. E.g. if they borrow 2000 of cash on a 50,000 dollar policy. At the time of death they would just subtract the 2,000 from the 50,000 and make it 48,000. Also most companies charge shay 8% for the right to borrow. So first year you owe 2000+160 or 2160. The problem with u.l.'s is they are usually issued at minimum premium. So when someone borrows from it hurts the policy because in later years if owner of policy doesn't pay the money back. They don't have the extra money to keep the policy funded. If you sell a u.l. try to over fund it. If they payment in beginning 500 add at least another 100. there are more things I could explain if you have questions feel free to ask. I'm sure there are better people here to explain.

 

[jonathan b]

Easier way to understand. Poor and older people have level billing on their energy bills. Now when they have a bad weather month they could be paying 100 when they should be paying 350. The energy company puts the extra money that is due into a balance sheet.(not sure what it is called) That is why you 'll find that certain people owe the energy company in the thousands.

 

[MedicareMillionair]

I have no idea what that could mean. It doesn't make sense to me.



Did you ask him what he's looking for so he could describe it to you?

Most people don't have a solid understanding of life insurance - regardless of whole life vs universal life - so don't be afraid to offer clarity where there is confusion, as long as you can bring clarity to the topic.

Whole life is a guaranteed cash value policy:
- Guaranteed premiums
- Guaranteed death benefits
- Guaranteed cash values
- Participates with the insurance company's profitability through receiving annual dividends (the only non-guaranteed element).

Universal Life is a flexible cash value policy:
- Flexible premiums
- Flexible/adjustable death benefits (can increase with medical underwriting)
- Flexible/adjustable cash values
- Earns interest or indexed-interest credits (if IUL) through current assumptions on the prevailing interest rate environment and using stock market call options on the general investment account.

That flexibility has a cost. And if the policy isn't structured responsibly, those costs can grow prohibitively expensive - as we've seen in the news with many insurers increasing the costs of insurance on these policies. Most agents say that "it's a side fund with ART or annually renewable term insurance". They're not wrong, but you do need to look at the total death benefit, cash values, and earnings to get an idea of how sustainable the policy can be. If the original illustrations showed an ongoing 9% per year... we already know that was an unsustainable assumption for that policy.

David Kinder Insurance and Financial Solutions | Riverside, CA

To understand indexed interest on an insurance contract, my blog article may be helpful:
David Kinder Insurance and Financial Solutions | Riverside, CA

Now, there are variations on UL. The most common would be Non-lapse Guaranteed UL isn't bought for cash values, but it is essentially a "permanent term" until a given age or policy year - as long as premium payments are made on time every year.

You can "simulate" the whole life guarantees in a UL or IUL policy depending on how you structure the policy. Typically, it's a minimum death benefit for a given period, with death benefit option B through the premium paying years, then you switch to death benefit option A.

There is a formula to help people (and agents) to understand how life insurance is structured:
Net death benefit = cash values + net amount at risk - any outstanding loans

When you can understand and explain the economics within a life insurance contract, you can bring greater clarity and help extinguish inaccuracies, like "the insurance company keeps the cash values when I die".

David Kinder Insurance and Financial Solutions | Riverside, CA

I hope this helps.

There's not a whole lot more to say than the above. As you stated, many agents use the ART with a side fund, explanation. I used this for years.

The one thing I would add is to draw pictures. Show term with a finite coverage period (nothing more than a one line drawing), then whole life with it's increasing cash value (one line with a swoosh upwards), followed by UL (one one with a rollercoaster on top). I always explained, this fell in the middle. It could be term or could be whole life depending on the level of premium payments. Simple drawings demonstrating these option was always my go-to.