Question:
What is the difference between whole life, universal life and term insurance? Pat G.
Answer:
Term insurance is exactly what it implies you insure your life for a period of time and at the end of the term you can reapply for another term if you qualify medically for the insurance. If you don’t qualify for the insurance rates are so high that very few people could afford to keep the insurance. For example, the premium for year one through 10 are a thousand dollars per year, if however, you did not qualify your 11th year your premium would be $11,000 and it increases very rapidly thereafter.
Term insurance is the least expensive initially if you’re planning on being insured for a longer time is the most expensive option. A major disadvantage of term insurance is that if you miss the premium payment for 30 days, most companies will make you go through medical underwriting to retain your insurance. If you don’t pass, you would end up losing your life insurance coverage.
Universal life started in 1979 when interest rates were very very high and it was marketed as an alternative to a whole life policy based on the high interest rates you could get a lot more insurance for the same premiums. The high interest rates did not last and many insureds had to pay substantially higher premiums to maintain their coverage. Pricing of most universal life policies that I have seen is based on a term to age 65. At younger ages the theory that the extra premium that you paid in the earlier years of the policy would offset the increasing term charges. If the insurance companies assumptions are wrong you take the risk of losing the insurance unless you pay substantially higher premiums in the future. The actual performance of a universal life policy will be based on the earnings that the company credits to the policy the actual expenses that the company assigns to the policy as well as for actual mortality. The universal life policy offers the most flexibility insurance as you can add extra premiums increase or decrease the face amount based on your insurability stop premium payments and also prefund the policy.
Whole life policies are based on a person dying at age 100. Today, many policies based that on a person died at age 121. Premiums are based so that the policy will mature at a specific age the premiums are guaranteed, death benefit are guaranteed and if you have a mutual company they may pay dividends which may be used to purchase additional insurance, decrease the premium, etc. For the individual who wants the most guarantees, the whole life policy would be the way to go.
With the universal life policy and the whole life policy once you are underwritten, the insurance company may not change your health classification. With most term insurance you have to show evidence of insurability at the end of the term. With the universal life policy or the whole life policy you are not taxed on the interest earned on the cash value. The only time that you would pay tax on the cash value is if you surrender the policy or took withdrawals in excess of what you paid for the policy. Many professionals recommend that you borrow at that point, as the income would be tax-free to you. An additional benefit of cash value is that it does not show up, as an asset is you apply for financial aid. In many states you also have protection from creditors for the cash value. As to the best policy for you is to determine what you would like to happen financially for your heirs when you pass and then pick your life insurance policy accordingly.
For all of your retirement questions, contact: The Retirement Doctor, LLC at: 1-800-406-1595 or www.retirementdoctor.com
