I heard this opinion today, "Universal life is a whole life policy on steroids." I hope this blog post brings clarity and points out the differences.
It seems I am forever writing about other permanent life insurance products and setting the record straight. What you’d normally find on my blog are articles that seem to be long and complicated if you do not truly understand insurance.
Today I will make it as simple as I can!
There truly are 5 huge differences that will show you why whole life, used for the infinite banking concept and Farming Without the Bank strategy, works.
When you buy a policy with a mutual whole life company and that company makes money you will receive a dividend. That does not happen with stock based company, their dividends are shared with the shareholders of the company. This is a huge factor when you have a correctly structured policy, the dividends in the later years and be many thousands of dollars.
Whole life insurance policies guarantee an interest rate of growth on the policy that is not reflective of the stock market. This may be an option with some universal life policies as well but it is not that often seen and there are other factors like fees that may wipe out that guarantee.
Fees/Cost of Insurance
All life insurance has fees and cost of insurance, after all it’s life insurance. The difference is how these fees are paid. In brief, whole life the fees/COI comes from the dividend portion of the policy so you will get a dividend after all expenses are paid just as a business owner does. With a universal/variable policy those fees comes from your premium payment. Should those charges go up and your premium is not enough to cover they will make up the difference by taking from your cash value or asking for more premium. This is where the problem arises even if you have guarantee on your policy of 2%, the charges may be 2% or more so you are essentially breaking even or going negative if that is the case. For more details on this please refer to my blog Universal Life Policies and Increasing Premiums.
When taking a loan on a whole life policy your money remains in your cash value account. This allows your money to continue earning you the guaranteed rate of return and in some cases with certain companies you will even continue earning the dividend on the borrowed money. With a universal policy any money borrowed against will be put in a side account (in most cases), this money will not reflect the growth for that time period however charges are still being applied as if the money was in that account. So no growth but paying charges, this is a quick way to have cash value go negative which will cause your policy to lapse (collapse).
Many are sold universal life based on the flexibility of reducing and increasing premium payments and are told whole life policies can’t do that. That can be true with certain companies, not all companies work the same. When a policy is set up for the purpose of the Infinite Banking Concept and Farming Without the Bank you CAN and WILL have flexible payments. We work with companies that allow this flexibility and it's truly a must for farmers to have this option.
Those are the five huge differences and here is one opinion that I hear a lot.
Higher Premiums with Whole Life (worst case scenario vs best case scenario)
When being sold death benefit many are taught that universal life will cost them less per month then whole life. In reality that is not a true statement. Universal life (along with variable and indexed policies) looks less expensive because the company is saying that the large market return of 6% will make up the difference and pay for the extra. So you are paying premium based on a market average return of 6% every year till the day you die and no increase in charges. What is the likelihood of that happening? Whole life does not do this as they only project the return based on guaranteed products and know to guarantee that policy you must pay the full amount in, hence never a risk of lapsing the policy.
When I run a whole life policy and look at a universal life illustration showing a guarantee to death the premiums are actually the same!
These are the huge differences so when someone says universal life is like whole life on steroids they have no idea what can be done with whole life and you as a consumer should run. Sadly, you the consumer have to educate yourself because agents are not always doing that themselves.
It’s a buyer be educated world out there when it comes to life insurance and please call me to help you in that education process. I have said it before and I will say it again, I am not here to make money off you and push you out the door. I am here to make sure you are educated, if you don’t want to be educated then we are not the right fit for each other.
If you have not gotten the book, Farming Without the Bank please do so now and begin that education process. It’s only 98 pages!
Read An Additional Article that talks about whole life, cash flow and your tax bill: Earn Interest On Your Tax Payment