"When is WL better than UL? Is the premium flexibilty the only advantage UL has."

I get lots of PMs. Most are of a personal situation nature and I'm always willing to take the time to answer them. Sometimes I get questions like this that are much more general. When this happens, I'll start a thread if I think that there are people who will care about the answer.

First of all, we need to make sure to understand the products.

UL=Universal Life UL combines annually renewable term insurance (ART) with a side fund. ART is term insurance that increases in cost every year. Here's an easy example. Let's pretend that the only cost is the Cost of Insurance (COI). Let's look at what happens as one gets older and is paying a constant premium. These are made up numbers.

Age Premium Payment Cost of Insurance Money going into side fund
30 $500 $200 $300
31 $500 $205 $295
32 $500 $211 $289
40 $500 $350 $150
50 $500 $500 $0
51 $500 $535 $-35
52 $500 $575 $-40
60 $500 $1300 $-1300
61 $1380 $1380 $0
62 $1450 $1450 $0
70 $3000 $3000 $3000

UL is nothing more than "Buy Term and Invest the Difference" but inside of a bundled product. The premium payment can be any amount as long as it's enough to pay for the cost of insurance. The COI increases every year, so ultimately it can become greater than the amount of money going into the policy. When this happens, money comes out of the side fund to help pay the insurance. When the side fund goes to $0, one's premium payment must then be (usually dramatically) increased to pay for the cost of insurance which will increase every year.

WL= Whole Life In general, when I am talking about Whole Life, I am referring to "Participating Whole Life from a Mutual Company". This means that the policy holders share in the profits of the company via dividends. Whole Life is an insurance product that has a guaranteed premiums, guaranteed death benefit, and a guaranteed cash surrender value. These guarantees are the worst case scenario. Once a dividend is paid, it can't be lost. A dividend will cause the death benefit and cash surrender value to always be higher than the guarantee or (owner's choice) cause the out of pocket premium to be always less than the guarantee.

A huge difference between the products is that the costs of a UL product are based upon attained age. The costs of a WL product are based upon age of purchase. This will make a UL product much cheaper in the short run, but much more expensive in the long run.

Now, back to the original question...

We are setting up a false choice. For instance, if $1,000,000 of WL cost $10,000 for a 30 year old and the COI for UL is $1500, and the owner can only afford $1500 this year, they could buy $1,000,000 of UL or $150,000 of WL. If that was the choice, UL would be far superior. We never want to sacrifice amount of insurance for type of insurance. So, in this example, instead of getting a smaller amount of WL, the owner should still purchase $1,000,000 of coverage, but it would be a combination of WL and term insurance.

For the rest of this conversation, let's assume that the premium is affordable to buy all WL or all UL. One of the "selling" points of UL is its premium flexibility. This is more illusion than reality and is probably much more of a negative than a positive. It's an illusion because one can't really decide to pay less. The cost of insurance isn't decreasing. It is always increasing. One can pay less out of pocket, but the costs haven't disappeared. All that has happened is that less money is going into the side fund or the side fund is being used to help pay the premium. When this happens, either more money has to be paid later or the policy has a much greater chance of lapsing. The reason why the flexibility is a negative is that because if money gets tight, and one isn't forced to reach into their pocket to pay their premium, human nature may allow them to make this choice despite the long term negative consequences of this action.

WL has no flexibility in the early years, but over time, it becomes very flexible. This is because of both dividends and non-forfeiture options.

Ex. Owner buys a $1,000,000 policy and is paying $10,0000 a year. At the end of the year, money is tight and they would like to pay less. They can't without lowering the death benefit. There is no flexibility.

What if this same scenario occurs 10 years into the future? The policy might have grown to the point where it has a death benefit of $1,100,000 and a cash surrender value of $100,000. Let's assume that the dividend at this point is $5,000. What flexibility does the owner have at this point? 1)If they pay out of pocket any premium of $5,000 or more, the death benefit and cash surrender value is guaranteed to grow. 2)What if they can't pay $5,000? They could pay less and surrender some of the $100,000 of additional insurance that their dividends have purchased. 3)What if they have hit really hard times and will never be able to pay premiums again. They will have three options. A)Surrender the policy for $100,000 B)Change their policy to extended term insurance. This will give them $1,000,000 of term policy for a certain number of years. The number of years will be determined by the cash surrender value. C)Change their policy to a paid up WL policy of a smaller amount. No further premiums will be paid and coverage will last forever.

Ok, since I don't find premium flexibility to be an advantage of UL, when is UL advantageous. 1)When insurance is needed for a finite period of time, but not for lifetime. There are times that it may make more sense than term insurance. These times are anomalies and don't happen too often. 2)At older ages (60+) when someone wants insurance forever and only cares about the death benefit. These policies are really lifetime term insurance. There is no premium flexibility at all because it's done at a premium that will typically cause the cash surrender value to go to $0, but the insurance company is guaranteeing that the policy will stay in force at the same premium. The situations where this makes sense is fairly frequent. Are you older? Are you fairly healthy? Can you afford the insurance premium? Do you want to leave money behind at death? If the answers to those 4 questions are "yes", a UL policy at a guaranteed premium makes sense. These policies are called GUL (Gauranteed Universal Life).

Thanks for the writeup!

but Why buy either?

both are inferioir to plain old Term life, right?

You might want to put a disclaimer like:
If Term life didnt exist

IE, in other threads you mentioned WL is not term plus investment of the excess funds. But from your detailed post, it is just because UL specifically separate out the insurance and investments. But in the WL, the difference between the WL premium and TL premium would be the investment amount. Am I missing anything?

Shandril said:Real question for me is why would one want to buy UL or WL when you could get a tailor-made term life and separately invest the remaining money?

For WL, what's the utterly compelling case for "bundling" basically a Term Life insurance with an investment? Is it cheaper in expenses? Are there tax advantages? In the past, many arguments have been made here and elsewhere that the bundling was prone to fee and real return obscuration and that most people would be better off with TL with separate investments. Has this paradigm changed any? I wouldn't think so considering how the insurance division of many insurers have been bailing out their failing investment divisions and will probably look at making up for the losses from their customers.

For the premium flexibility case, Term Life with separate investment also sounds like the best deal to me since you can always scale down (temporarily) the investment contributions without touching the life insurance policy.

I know it's a lot case by case and you tried to advise on WL vs. UL but I don't think you can have this discussion without looking at the TL + separate investment options which IMO makes sense for most people.

Again, I want to keep this about WL vs. UL. I'm glad that you posted this because this illustrates the precise problem that I have with articles that I read about WL. They talk about WL, but they describe UL. When you bundle investments with term insurance, it is not WL, it is UL.

Shandril said:Real question for me is why would one want to buy UL or WL when you could get a tailor-made term life and separately invest the remaining money?

For WL, what's the utterly compelling case for "bundling" basically a Term Life insurance with an investment? Is it cheaper in expenses? Are there tax advantages? In the past, many arguments have been made here and elsewhere that the bundling was prone to fee and real return obscuration and that most people would be better off with TL with separate investments. Has this paradigm changed any? I wouldn't think so considering how the insurance division of many insurers have been bailing out their failing investment divisions and will probably look at making up for the losses from their customers.

For the premium flexibility case, Term Life with separate investment also sounds like the best deal to me since you can always scale down (temporarily) the investment contributions without touching the life insurance policy.

I know it's a lot case by case and you tried to advise on WL vs. UL but I don't think you can have this discussion without looking at the TL + separate investment options which IMO makes sense for most people.

You raise a good point, but the answer is that the insurance industry has convinced Congress (maybe hoodwinked is a better word for any tax policy mavens out there) into giving the industry special tax breaks such that the money made investing the policy holders money and the payout to the policyholder (in the guise of "insurance") is TAX FREE. The insurance industry is not the Community Chest, of course (to put it mildly), so it slurps off of the tax bennie in the form of high commissions to its salespeople, high salaries to its executives (even mutual companies) and, of course, benefits to its policy holders (nonmutual companies). But, if you find the right policy, i.e. a "low load" UL or WL policy, it's worth it because you get to share in the tax ripoff of the taxpayers that the insurance industry has lobbied for itself. Some companies are more greedy (and invest less well) than others, so as with anything in life, caveat emptor and check out what you buy and who you buy from. But, courtesy of Congress and the tax break, I wouldn't reject out of hand in favor of term plus invest the difference.

rcmkensington said:You raise a good point, but the answer is that the insurance industry has convinced Congress (maybe hoodwinked is a better word for any tax policy mavens out there) into giving the industry special tax breaks such that the money made investing the policy holders money and the payout to the policyholder (in the guise of "insurance") is TAX FREE. The insurance industry is not the Community Chest, of course (to put it mildly), so it slurps off of the tax bennie in the form of high commissions to its salespeople, high salaries to its executives (even mutual companies) and, of course, benefits to its policy holders (nonmutual companies). But, if you find the right policy, i.e. a "low load" UL or WL policy, it's worth it because you get to share in the tax ripoff of the taxpayers that the insurance industry has lobbied for itself. Some companies are more greedy (and invest less well) than others, so as with anything in life, caveat emptor and check out what you buy and who you buy from. But, courtesy of Congress and the tax break, I wouldn't reject out of hand in favor of term plus invest the difference.At least for term life product, I don't see the current taxation rules are bad. You pay the premium with your already taxed dollars, then your death benefits is free of income tax.

WL and UL do enjoy the tax sheltering growth for their investment portions.

Insurance Expert: please collect all your threads together, including ones you didn't start but gave detailed replies to, and create a single updating thread linking them all. It's good stuff, thanks!

rcmkensington said:InsuranceExpert said:rcmkensington, can you name a low load WL policy that outperforms one that pays commissions? I can't. I'm not saying that it doesn't exist, but I don't know of one. By the same token, no load term policies aren't less expensive than load ones despite the fact that the commission on the typical term policy is in excess of 100%. It's less expensive for insurance companies to pay big commissions than to hire people on salary. Commissions are nothing more than a distribution expense and it's the cheapest way to distribute the product.

You must sell life insurance! Or you did at one time. Sounds like what stockbrokers try to tell me -- that "their" mutual funds or products they are trying to sell get better investment results than no load or low load products. In the case of financial products, that story has been largely disproved -- ask John Bogel. It stands to reason that if 90% or more of initial premiums don't go to the investment, they go to the commission, that the return is going to be hurt.

But to answer your question, I'm an observer (and consumer) relative to the life insurance industry and no, I don't know the products well enough to cite a no-load insurance policy that pays better than a high commission policy.

But, I'm not sure anyone can because the insurance industry and its returns are opaque. What financial page can I go to compare insurance rates of return? And, lessee past performance is not a guarantee of future results -- that also applies to insurance company investments, right? When all is said and done, it'll take a lot to convince me to invest in a full commission insurance product. But, as a good salesman, maybe you can Tell me the policy you recommend in a PM. Or, better yet, post it for all of us to see. I don't know of any FW member not interested in a good investment deal.

The above said, IE, you know the insurance industry pretty d..n well. But, be honest enough to admit that it is a bloated subsidized industry that sucks off of the tax break (as do other industries BTW) and that a consumer has to be careful in buying insurance products as an investment, particularly since the industry is so opaque.

I do sell life insurance and I do like high commissions. The problem with talking about commissions is that it really misses the point. Insurance companies have expenses. Commissions are an expense. The issue isn't the commissions. The issue needs to be the total expenses. Compare what happens when you buy a term policy from me from XYZ company vs. buying one directly from ABC company that doesn't pay commissions. The premium from XYZ company is $1000. They probably pay $1200 in total commissions with a nice chunck of that going into my pocket. ABC company charges $1100 and pays no commissions. Why does ABC company charge more despite paying no commissions? It costs them money to hire the salesperson. It cost them money to train them. It costs them money for their salary. It costs them money to pay for their benefits. It costs them money to replace them. There is only one reason for an insurance company to pay big commissions. It generates the most profit for them.

Here's another example. Insurance Company DEF charges $1200. Insurance Company GHI charges $1200. They are both highly rated. DEF pays $1300 in commissions. GHI pays $1400 in commissions. GHI will have many more sales and much higher profits and lower per unit costs.

The load/no load argument of mutual funds doesn't hold up here. The reason is that no-load funds are less expensive. Low load (really no such thing as no load) insurance products are more expensive.

I don't recommend a specific policy. It all depends on the individual. If a low-load product was better, I would recommend it.

The major tax break of insurance is that the death benefit is free of income tax. Our tax laws have two purposes. 1) Raise revenue 2) Control behavior It makes sense to encourage people to buy life insurance. Long term care insurance is the same way.

Let's re-name this thread "Whole Life Insurance vs. Universal Life Insurance, How to prove a point using completely made up numbers and facts"

This thread reads more like a sales pitch than useful information since the numbers and scenarios are all fudged.

Term Life FTW.

howwlovey said:I am 31, married with two kids (<1 and 3 year old) have a stable job. which is a good insurance for me? WL,UL,TL.

There isn't enough information, but most likely 100% term insurance or a combination of term insurance and WL with the bulk being term. The disability advice was excellent.