 Personal Finance PowerPoint Presentation. Whole Life vs. Universal Life Insurance. Prepare to get financially fit by practicing personal finance. Insurance is part of our overall risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, looking something like set the goals, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia. Whole Life vs. Universal Life Insurance. Which you can find online. Take a look at the references, resources. Continue your research from there. This by Puja Dave. You mean Dave Puja? No. Puja Dave. Updated May 23rd, 2022. In prior presentations, we've been taking a look at insurance in general. We're moving into now the life insurance. We talked about life insurance in general in prior presentations. And we want to keep in mind the major distinctions on types of life insurance. That being the term insurance, which is more the classical kind of life insurance where you're focused in simply on buying life insurance for life insurance. And then we've got the formats of permanent life insurance where we might have more complex strategies that we might be putting into place when we're thinking about the permanent life insurance. Now we're thinking about the permanent life insurance options that we're considering Whole Life vs. Universal Life Insurance. This being the overview. So those two types of life insurance both fall into the category of permanent life insurance as opposed to term life insurance, unlike term life insurance, which guarantees a death benefit payout during a specified period. Permanent policies provide lifetime coverage. So we got the lifetime coverage as opposed to the term coverage, which has a term of time which will be covered. So if you cancel your permanent life policy, you will receive the policy's cash value minus any fees. So these types of life insurance policies are both typically comprised of two parts. You got the saving or investment portion and an insurance portion. So that component, the fact that they have those two parts means that you can kind of think of them as going after two goals, one goal possibly being the investment planning side of things because you've got this cash value component to it, possibly having tax benefits related to it, possibly having estate planning benefits related to them. And then you've got the other side of things, which is of course the classical life insurance. Now when you're thinking about the types of benefits you might get from the investment side of things, it's likely that those benefits might be more applicable for higher income individuals. So you want to make sure that you know exactly what your plan is, what you're trying to be purchasing when you're going from a simplified life insurance, term life insurance to more complex life insurance where you might have more complex goals such as the permanent life insurance. So this makes the premiums higher for the permanent insurance than those for term policies. Policy holders can also borrow against the cash value of the policy. So this can be beneficial because you might think, hey, if I haven't maxed out things like my retirement plan, my 401K, my 403B, my IRA, for example, why don't I just buy term life insurance, for example, and then put my savings in something that's designated specifically for a savings purpose, that being like a 401K where I can still get tax benefits in a similar fashion and in other words a deferral kind of component there. But if you put money into the 401K, it's going to be kind of restricted to some degree. If you pull it out, you might have penalties related to it. You have to have certain reasons for pulling it out. You have restrictions to it when it's in, say, a life insurance policy as well. But you might have the option of being able to borrow against it, which is kind of similar to pulling it out. So in the event that you need it, you might be able to have that option, which is kind of nice. For this reason, permanent life insurance is also known as cash value insurance. While similar in some respects, whole life and universal life insurance policies have some key differences. While whole life insurance offers consistency with fixed premiums and guaranteed cash value accumulation, universal life insurance UL gives consumers flexibility in the premium payments, death benefits, and the savings element of their policies. Here, we'll look deeper into each of these types. So first, we got the whole life insurance. Whole life insurance covers you for the rest of your life, regardless of how long you may live. As long as you keep paying the premiums, your beneficiaries will receive the death benefit when you die. This policy is highly suitable for long-term responsibilities such as a dependent adult child care or post-death expenses like a state's taxes. So in other words, the term is usually quite fine if you have a specific amount of term usually when you're buying the life insurance, you're going to say, well, I'm going to need the life insurance during my earning years when people are dependent on me and at the point in time that the child is growing or something like that, they're going to be self-dependent hopefully at that point in time. But you might have people that are going to be dependent on you, say for life, for example, and you might have some kind of insurance to cover things like funeral costs or something like that, which could be useful. How whole life insurance works. One of the features of this type of life insurance is that it combines coverage with savings. Your insurance company puts part of your premium payments into a high-interest bank account or investment account. So here's kind of like the investment component to it. Again, you might think, well, if I'm buying insurance, why don't I just buy insurance with term insurance and then invest the difference somewhere else? You've got to have some reason or rationale to say why you wouldn't do that, some kind of tax planning strategy or some kind of strategy with regards to the policy itself. So that's a question you want to kind of keep in your mind. With every premium payment, your cash value increases. This saving element of your policy builds up your cash value on a tax-deferred basis. So there's the tax component, you've got a tax-deferred basis. So again, the question would be, well, what if I just bought the term policy and I invested the difference in like a 401k plan or an IRA? You might not be able to do that if you maxed out your 401k plan or an IRA or something like that. So that would be one of the rationales where that deferral could be useful, and that would usually happen again with, of course, the higher income individuals who have maxed out other deferral plans possibly. Whole life insurance is made to fulfill an individual's long-term goals, and it is important to keep it going for as long as you live. Frozen cons of whole life insurance, one attractive feature of whole life policies is the guaranteed cash value. Since you can borrow against it or surrender your policy to get the cash value, it offers some financial flexibility in case of an emergency. So that's kind of nice, and again, a little bit different possibly that if you invested the difference and like an IRA, you might get penalized to pull the money out of the IRA if there aren't certain conditions met if you pull the money out say early before retirement, whereas if you put it here, maybe you can't pull the money out, but maybe you can borrow against it, which is kind of like the same thing or cancel the policy, which gives you a little bit more assurance without the penalty possibly. So the dividends, the dividends your company offers give you some flexibility as well. You can opt to receive them annually in cash, let them accumulate interest, or use them to reduce your policy's premiums or buy additional coverage. However, the level premiums fix death benefits and attractive living benefits, e.g. loans and dividends make this policy quite expensive, especially compared to term insurance. So obviously, given the fact that you got this investment component, this cash value component, this tax deferral thing related to it mixing together insurance and investment and so on, makes it more expensive than just buying term insurance and investing possibly the difference. So it is advisable to buy whole life insurance when you're younger to be able to afford it in the long term. So if you buy it younger, then that cash value has time to kind of make its work its magic, I guess. Universal life insurance. Universal life insurance is also called adjustable life insurance because of the flexibility it offers. You have the liberty to reduce or increase your death benefit and pay your premiums at any time in any amount, subject to certain limitations once there is money in the account. So how universal life insurance works. When you make a payment to your universal life insurance plan, part of it goes into the investment account and any interest accrued is credited to your account. The interest you earn grows at a tax deferred basis. So you got that same kind of thing, meaning you're not paying taxes on it when it's growing, which you typically would if it was outside of any kind of account. Obviously, again, if it was in another account under a retirement umbrella like an IRA, you'd have a similar benefit, but if it was just in some other account where you got interest, you would be paying taxes on it when you've got the interest. But here, when you get the money out, that's when you might be paying the taxes in a similar fashion as like an IRA or 401K plan. So you can adjust the death benefit when needed, increasing it, often subject to a medical exam if your circumstances change or lowering it to reduce premiums. Alternatively, you can use your cash value to pay premiums as long as there is enough money in that account. Pros and cons of universal life insurance. The ability to adjust the face value of your coverage without surrendering your policy is an attractive feature of universal life insurance as your financial circumstances or responsibilities change. You can increase, decrease, or even stop premium payments. That's kind of nice. Another perk is the ability to partially withdraw or borrow funds from the cash value so that, again, you got that kind of thing, which is nice if you needed the cash in the case of an emergency. However, you must not make repeated withdrawals as this may reduce the cash value amount and leave you little in the time of need. The main downside of universal life insurance is the interest rate, which is often dependent on market conditions. If the policy performs well, there are chances of potential growth in your savings fund. On the other hand, if it performs poorly, the estimated returns are not earned. Another negative feature, the fees. Surrender charges may be levied at the time of terminating your policy or withdrawing money from the account. Key differences. The biggest difference for policy holders between whole life and UL is the guarantees. Whole life has a guaranteed death benefit, level premiums, and growing cash value. This growth in cash value comes from annual dividends that are credited to policies. Universal life provides flexibility and lieu of guarantees. You can pay more or less each year for your policy, and this will also allow the cash value and death benefits to fluctuate. Rather than dividend payments, UL policies are credited based on interest rates. This can lead to a UL policy becoming underfunded, causing premiums to rise. If those payments cannot be met, the policy can terminate. With whole life, you pay higher premiums for the guarantees you are given, and equivalent UL policy will cost less, but also carry a certain degree of risk to policy holders. So then we got the whole life versus the universal life. Key differences, whole life, universal. You got the fixed premiums on the whole life versus flexible premiums, universal life, guaranteed death benefits, whole life, universal life may allow you to increase or decrease the death benefits. Whole life offers you cash value to use while you're still living. Universal life offers cash value potential. Whole life dividends are guaranteed. Universal life interest rates can change over time. Whole life, higher premiums, universal life, lower premiums. You got whole life can never become underfunded while universal life may become underfunded and lapse. Special considerations, the right life insurance for you will depend on your family structure and financial situation as well as your appetite for risk and desire for flexibility. In addition to universal and whole life, you can also explore other forms of life insurance such as term, group life insurance, and more. Regardless of which type of policy you decide on, be sure to compare the companies you're considering as well as insurer. You're getting the best whole life insurance or the best universal life insurance possible. What is term life insurance? We talked about term life insurance in the past. This is the one that you want to be comparing against. And term is probably the default life insurance that you want to keep as your baseline when you're considering any other factors. If you're buying anything other than just life insurance, then you want to be asking the question, what is your goal when you're buying the insurance and why is this particular tool meeting it? Why not just buy term? I would always be asking the question, why don't I just buy term and invest the difference? And then you'd have to show your rationale. That would be the way I would look at it. Term life insurance is a low cost option that provides a death benefit for a given number of years. The term, such as 10 to 20 years, term policies unlike whole or universal life do not accumulate any cash value. Term life is often the cheapest option. What is indexed universal life insurance? Indexed universal life, IUL is a variation of universal life, UL whereby the cash component of the policy is linked to the performance of a stock market index such as the S&P 500. The policyholder decides how much cash value to assign to either a fixed amount or the equity indexed account. There will be a cap above which the policy will no longer credit the account, such as 12% per year. Thus, even if the S&P grows 20% in a given year, the policy will only earn 12% more over. If the index falls, returns can be inferior, though there are often floors to prevent extreme losses. So again, it's a little bit more complex or they're trying to tack it to an index, right? Which again, it has that kind of investment component to it when you're looking at the insurance. So how long does universal life last? As long as universal life policy is fully funded and premiums are paid on time, a universal life policy will be enforced permanently until one's death. Can you convert a term life policy into whole life? Depending on the insurance company and conditions of a term policy, you may be able to convert it into permanent coverage without needing a new medical exam. The new whole life policy will come with higher premiums based on the age you are when you do the conversion.