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Life Insurance
Term, UL, VUL and Whole Life Insurance: The Differences
By Amy Rose Herrick
Amy Rose Herrick, ChFC, IAR Economic Consultant, Amy Rose Herrick, ChFC, Economic Consultant
Many people are under the impression that they must buy one type of insurance, or the other. One choice or the other choice decision, period.
The truth is, you could all types of coverage in force at the same time, on the same person. Perhaps you need a large term policy while the children are young.
Maybe you bought a Universal Life (UL) policy to cover some midrange retirement and pension issues.
Finally, you bought a Whole Life (WL) or Variable Universal Life (VUL) permanent policy for the time frames through the retirement years, and estate planning periods.
Perhaps you have no recollection why you purchased one type over the other in years past other than it sounded like the right thing to do at that time.
Many household would be better served if they implemented a comprehensive program of combining term and permanent insurance. Probably even yours.
Term Life Insurance
Term life insurance is generally the lowest premium per thousand insurance (but not always, see this covered in the VUL area below). You often hear terms of premium guarantees such as one year, five year, ten year, twenty year, etc. After the guarantee period, if the policy is renewable, you will see steep increases in premiums. The danger with this strategy is the possibility you may not be insurable at the end of the fixed premium term and coverage could lapse if not converted (if available) to another plan offered by the insurance company. Term insurance is often compared to renting, you do not generally gain any equity or premium, refunds with low priced term coverage. The actual number of term policies that pay a death benefit is very small, less than about 5% because these are often not held for long periods of time, or they have lapsed before the death benefit is payable.
UL or Universal Life
This is a combination of term coverage and what could be thought of as a savings account to pay the future higher term premiums. You are generally over funding the coverage in the early years and more of the payments go towards an accumulation account. Then in later years, as the deposits become insufficient to pay the term coverage premiums, money is taken from the savings portion to pay what is needed. If you visualize a see saw, you will get the basic idea. The premium in the early years is the lightest end up in the sky. The Savings is touching the earth. Now as the weight of the premium gets heavier, the savings side begins to rise until the weight of the premium has overtaken the savings side. If you reach zero in savings, then premiums would need to increase or coverage would lapse.
Whole Life
This type of "cash value" life insurance is permanent and is generally carried for a lifetime. You pay premiums to keep the policy in force. Part of your premium goes to the insurance company for the death benefit element of the policy. In addition, many whole life policies have the potential to build cash values or dividends, but not all. Premiums generally remain fixed for the duration of the policy, or until they reach what is referred to as “Paid Up” status when no future premiums are required to keep coverage in force. It is important to know your policy provisions. In this scenario, the insurer takes on the investment performance risk.
Variable Universal Life
This coverage is similar to whole life only in that it is designed to be held for a lifetime. The coverage in essence shifts the investment risk from the insurer to the policy owner who has a selection of “sub accounts”, sometimes as many as 50 or more a policy owner can use to “invest” excess policy premiums not needed to pay for the term life insurance component in the policy. You may do better, about equal or worse than the insurer would have with your funds, but you are in control. You could vary your risk tolerance if desired from aggressive to conservative in most cases with either a phone call or online account access.
One unique feature with a VUL policy is called “Table Shaving”. If you are a rated person, and often you know who you are, you can have up to four tables “shaved” off your rating with a few companies. So a person, who is a table 4, or table “D”, would be insured without a rating at all as standard. This is an incredible opportunity to secure the coverage you have been putting off because you hated to pay extra on the term policy you were looking at. In this situation, you can often secure permanent coverage for less than the price of the same face amount of term. I have used this strategy successfully on several clients with excellent results. By the way, a table “D” at one company does not automatically mean you will be a table “D” everywhere else.
If you are a rated individual, or think you may be, it is definitely an angle you should look into without delay. Insurance products are constantly changing, and this opportunity may or may not be available next year. Applying to more than one insurer at the same time would also be helpful to enable you to secure the best coverage available.
Combined Strategies
Some people may see a need for and appreciate the benefits of permanent insurance, but just can't afford the higher premium costs at the present time. For these individuals, combining a program of term and some permanent insurance may be a workable compromise strategy to implement.
Probably the worst thing to do is identify a need of $1,000,000 and insure only $150,000 of this need with a permanent policy using up all premium dollars available thinking no dollars are wasted on term coverage. In this scenario, at the time of death, the family is left with inadequate resources for the future that can never be recovered, $850,000 worth of living expenses, college funding, health care, housing and transportation are often all lost along with a spouse. A better solution may be to purchase only $50,000 of permanent to get started and the other $950,000 in term that is converted a little at a time
Life insurance will play a vital role in your overall financial strategies during your lifetime. Sadly, life insurance is often the one that is most often disdained and ignored even though for the vast majority of insured’s, life insurance proceeds will provide the largest asset at death to family members, spouses and business partners.
It is essential to assess your insurance needs and purchase the most appropriate coverage for your family's specific situation now, not tomorrow or next month. Why not take a few minutes and review your coverage with a licensed agent today so you receive the greatest benefit from this often overlooked asset.
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