Universal life insurance is often marketed as a “cheaper” version of whole life insurance, and this myth has often landed otherwise savvy savers in hot water. In reality, if the two policies are truly the same, how could one be cheaper and yield the same results? The answer is, they’re not the same. And universal life insurance has given whole life insurance a bad rap.
The allure of a universal life insurance policy is that you have flexible premiums. Most people take this to mean that you can pay what you want, and your policy will still grow. However, the underlying danger is that you could be underfunding your policy, and putting it at risk.
The State Financial Agency Cautions Against Universal Life Insurance
We don’t like to hear that anyone has lost money—our mission is built upon building people up. However, we can be grateful that there are more people agencies backing up the message we’ve been trying to share.
In February of 2019, New York state regulators issued a warning, including the stark message: “Beware of Increasing Charges.” The article continues to share information for consumers, including the message that very little about universal life insurance is guaranteed. This is in direct contrast to whole life insurance, which has a host of guarantees, including:
- A guaranteed level premium—you’ll never have the rug pulled out from under you
- Guaranteed cash value—your account has a guaranteed floor, so you won’t lost money, and it’s guaranteed to increase each year
Superintendent Linda Lacewell issued a statement about universal life, saying:
“The Department has seen many cases of consumers who purchased universal life insurance and who made payments for years, thinking their premium payment would not change or that their coverage would remain in effect. But many found that their policies had lapsed (were no longer in effect) with little to no [cash] value due to declines in interest rates, market volatility and other factors, or they were required to pay large additional premium payments to keep their coverage in effect.”
The unfortunate truth is that many agents and advisors don’t understand all the pitfalls of universal life insurance for themselves. So many were rooting for whole life’s younger, cheaper cousin, however we will continue to educate those who will listen.
An Increase in Universal Life Insurance?
Sadly, there’s been an alarming rise in universal life policies sold. Namely, Indexed Universal Life (IUL). They’re sold as the product that does it all, including the ability to participate in the stock market without the downside.
The problem is, you can’t directly participate in the stock market without being exposed to risk. And IULs still have many of the same internal flaws of the older ULs, which have caused them to collapse in the first place. The costs increase, which drives premiums up, which makes the infrastructure of the policies crumble.
Because of the way they’re marketing IULs, it can be hard to see the red flags. So before you purchase ANY policy, here are questions we recommend asking. These will put you back in the driver’s seat, and decide for yourself what kind of policy you want.
7 Questions to Ask Before Getting Life Insurance
1. Is the death benefit guaranteed, no matter how long I live?
Thanks to the advances of technology, people are living longer. In some cases, this means that people are outliving their universal life policies that they believed to be permanent.
If permanent insurance is important to you, beware of death benefits that are only guaranteed with an additional rider, or only to a certain age. According to the CDC, in 2014 there were 72,197 Americans age 100 or older. You can bet that number will continue to increase!
2. Does the policy endow?
This question is related to the above question, and is equally important. Endowment occurs when you live beyond the age defined as the “policy maturity date,” when the death benefit is paid to you. This is the sign of a true permanent policy.
UL policies don’t endow. And as the insured ages, the cash value tends to deplete.
Whole life, on the other hand, is guaranteed to endow. And should endowment occur, the cash value equals the death benefit—guaranteed.
3. Do policy loans or changes in premium jeopardize the guarantees?
Read the fine print of your policy contract, you’ll be glad you did. Seemingly simple things can actually put your life insurance policy in jeopardy, particularly universal life. Even a single late payment.
Whole life insurance guarantees remain unchanged, so long as the policy stays in force. It’s much easier to do so with whole life insurance, as there are provisions that can accommodate you. However, care must be taken to repay policy loans—accumulating too much interest can backfire.
4. Are premiums guaranteed?
“Flexible premiums” is one of the more convincing promises of universal life insurance. However, time has revealed that the contracts have given insurance companies the flexibility to change premiums, not just the insured.
We prefer guaranteed premiums, with the option for flexible payments. This means that your premiums will never rise. However, you still have the option to pause or reduce payments for a while. This is possible because of the careful structuring of a whole life insurance policy.
5. Are guarantees based on a rate, or a dollar amount?
Unfortunately, any life insurance is often sold as a magical solution that can yield a fortune for modest payments. However, this isn’t the case. Universal life uses this to appeal to potential investors, however their guarantees are often based on a rate. And no matter how high the rate is, there often aren’t enough dollars in the policy to make much of a difference.
Whole life insurance isn’t magical either, however guarantees are based on a dollar amount. So would you rather have a few dollars potentially earning a high rate, or more dollars growing for you at a steady rate? By guaranteeing a minimum dollar amount, insurance companies are also establishing a minimum net return.
6. Is the policy correlated to the stock market?
We believe that permanent life insurance should be the asset that provides certainty to all of your other assets. This is how it makes your entire personal economy work even better. IUL policies, however, are not certain. And contrary to popular rhetoric, they can lose money. In part because of costs, yet they are also corelated to the stock market.
If you’re using life insurance as a savings and certainty asset, exposing it to risk is the last thing you want.
7. Does this type of insurance have a history stability?
Whole life insurance has a history of paying dividends to policy owners, a good track record for legacy planning, and is a proven asset with hundreds of years to back it up. However a quick Google search of “IUL lawsuits” and you’ll see that the same cannot be said.
It’s important to do your research, get multiple opinions, and be diligent in finding the right policy for you.
Why We Recommend Whole Life Insurance
This isn’t going to be the right choice for everyone. However in a scenario where permanent life insurance does make sense, whole life insurance can provide you with certainty. You’ll be able to grow your cash value quicker, create good savings habits, leverage your assets to acquire more, create a legacy, and take advantage of other living benefits.
The misinformation about whole life insurance and universal life insurance is astounding. Even in the mainstream financial spheres, you’ll see misrepresentations of each. That’s why the Prosperity Economics Movement exists, to correct misinformation and help people leverage the strategies of the wealthy.
A Prosperity Economics Advisor can help you:
- Understand how whole life insurance fits into your personal economy
- Increase financial certainty in your life
- Help teach the differences between different types of insurance, and how to best use them in your own strategy
- Get the most enjoyment out of your life insurance policy