Whole Life or Universal Life?
Universal life was created in part to deal with some of the shortcomings of traditional whole life insurance. Whole life insurance, as the name implies, provides insurance for the insured’s lifetime. The premiums are also level, and the plan provides guaranteed cash values. Whole life policies can be divided into two categories: participating policies, where the policy owner participates in the insurance company’s profits and the plan pays out a dividend; and non-participating policies, which are lower in cost and do not pay out a dividend.
The primary disadvantage of whole life insurance is its failure to disclose how the premium is allocated between the cost of insurance, administration costs and the investment portion. Also, they do not offer the variety of investment choices found in universal life plans.
Universal life offers unbundled insurance—the policies separate out the life insurance, administration fees, premium tax and investment charges. But in many cases this separation can create further complexity. Most universal policies have multiple cost of insurance options. They offer an increasing cost of insurance structure which results in lower risk charges in the early policy years but higher costs in the later years, and a level cost of insurance structure which generates higher initial charges but the rates are level for life. The investment choices can also also vary widely, from no-risk guaranteed certificates to high-risk accounts linked to growth-oriented equity funds. AIG’s Universal Life plan has over 400 investment accounts, so you had better choose a broker who knows his/her stuff.
Universal life policies also offer flexible premiums, a choice of level or increasing death benefits, and the ability to take premium holidays if you have to stop paying your premiums in the later policy years. One caveat to beware of is that many universal life policies have surrender charges if you want to access your cash value within the first ten policy years.
Whole life policies have fewer options. The premiums are fixed and cannot be increased or decreased by the insurance company or the policy owner—some may view this as an advantage, while others may prefer more flexibility. The investment return on a participating whole life policy is linked to the profitability of the insurance company and long-term interest rates. It should be noted that while the dividend rates on most participating whole life policies have declined with the slide in interest rates, the yield in most instances is still significantly higher than found with similar low-risk universal life accounts.
The majority of non-participating whole life policies are fully guaranteed contracts. The premiums, pay periods and cash values are all contractually stated and cannot be altered by the insurance company. However, these policies produce very little cash value in the early years, so it is crucial that the policy owner be committed to this policy over the long haul before signing up.