Universal life was created for the flexibility that it provides customers. It is a form of permanent insurance along with whole life, but it provides flexible aspects. Whole life insurance is pretty straight forward and requires that the same premium always be paid to keep the policy in force. If the premium is not paid the policy will lapse, unless the dividend is large enough at that point to cover the premium. This is know as premium offset on whole life. Universal life allows for a flexible premium to be paid. There is a range that can be paid to keep the policy in force.
For a client who wants to emphasize and grow the cash value, they should fund the policy near the MEC level. The MEC level is the maximum you can put in a life insurance policy and still qualify for favorable tax treatment. Others may only care about the permanent death benefit. For clients who just want the death benefit, we suggest they fund it at the very minimal level and this is called guaranteed universal life. Of course, a lot of clients fund the policy in between the bottom and the top level. If there is enough money in the cash value, premium payments can be skipped. This option would obviously not be there on the guaranteed UL as there is little if no cash value. The amount you pay can vary and you can start by funding it at the highest level and you can always fund it less later.
On top of that a level death benefit or increasing death benefit can be selected. You can start off with increasing and level it out later if you want. Universal life is truly a flexible product that can meet many different objectives.
You should make an investment in your child and buy them a whole life policy when they are young. Your child will be locked into that mortality for the life of the policy and the premium will never go up. On top of that you will guarantee your childs insurability for the future. When they have kids of their own, they will want to have life insurance and they will have this great policy that you bought them.
Another great aspect of having the policy and buying it early is the longer period to accumulate cash value. By the time your child has had the policy for 20 or 30 years there can be a significant amount of cash in the policy. The cash value can be borrowed against for emergency funds, college funds, or for any type of opportunity. A dividend paying cash value policy also has the feature of premium offset. Premium offset is the ability to use the dividend to pay the premium and keep the policy going, with no new funds. After a period of time, typically 10-15 years, a policy can build up a dividend that is substantial and big enough to pay the premium. I prefer to continue to pay on my policy as the more I pay, the more I fuel and grow the cash value. In fact, I put in extra money above my premium every month that goes right to my cash and buys pay up additions.
This is definitly a great present for a child that they will really appreciate when they get older.
One great feature on whole life insurance is the premium offset option. This is where the dividend on a whole life policy becomes large enough to cover the full amount of the premium. This in turn gives the policy owner the option to stop paying the premium and let the dividend cover it. It is not guaranteed that the dividend will remain large enough to cover the premium forever, but often it will be the case.
The premium offset is also known in the insurance world as a paid up policy. We usually will illustrate that for our whole life clients when they are buying a policy or if they want to see where there policy stands. Ask your agent for an in-force policy illustration, to see the status of your policy. While stopping paying the premiums may seem like a dream come true, it is often not nearly as beneficial as continuing to pay the premium. For example, if the policy has been going for 15 years, everytime you make a premium payment the cash value jumps. I have seen policies that actually have a dividend which is many multiples of the premium.
The death benefit in a whole life policy over time will typically grow as well if you select the paid up dividend option. If you do premium offset the policy, it tends to level off the death benefit. I think a lot of people are just happy to not have to pay premium anymore. Both options are good and they are a couple reasons why whole life is so popular.
Regular vanilla whole life insurance has taken a beating from some in the media that profess that it is too expensive and that you should always buy term. I agree that term is often the best solution for some clients at that given point in time, but having whole life can be powerful vehicle. Many times to meet large insurance needs our clients will buy a majority of term and buy a smaller portion of permanent insurance. This may be the only affordable way for the time being to meet that large insurance need.
Term life insurance is like renting and the premiums are usually much less expensive than whole life at first. What happens at the end of the level term is the premiums skyrocket through the roof and most people drop the policy at that point. The advantage to whole life insurance is that you lock into a premium amount and it stays level forever. When the level term ends and the premium is skyrocketing, the whole life keeps plugging along at the same level. If you select a good mutual life insurance company that consistently pays a good dividend, then you will also have built significant cash values. The cash values grow tax deferred and can be used to help finance things during your lifetime while you continue to have permanent insurance. For example, you want to buy a business at age 42 and you have accumulated a cash value of $56,000. The business is going to require an initial investment of $37,500. You pull the 37.5 out of the whole life and the insurance company charges a loan interest rate. Let’s say it is 6% they charge and you pay the loan back at 10% interest. Not only are you paying yourself back, but you are making a 4% spread on the money creating a turbo charge effect on your policy. Four years later, after paying the amortization schedule for the business, you borrow money from yourself again to buy a new car. Of course you pay yourself back once more.
The whole life cash value is guaranteed to get better no matter what. There are not many financial vehicles that you can say that for.
