Whole Life Insurance - Pros & Cons of Universal Life Insurance

For many people, term life insurance does not offer the security they want for their later years. They worry that when a 30- or even 20-year term policy expires, they may not be insurable, or that changes in their health, weight, or age will make another term life insurance policy unaffordable. Such consumers value the guaranteed insurability and fixed pricing of permanent life insurance. They may balk, however, at committing a single death benefit and premium amount early in life, knowing that inflation and changes in family size may require a larger death benefit later in life than they can afford at the time the contract is written. For such farsighted individuals, universal life insurance may be the perfect insurance product.
Many people think any kind of permanent life insurance is a waste of money. They argue that a person needs life insurance for only part of a lifetime: those years when an individual is responsible for supporting a family. They reason that if a person dies after the children are living on their own, the surviving spouse ought to be able to support himself or herself without the help of a life insurance death benefit. According to this logic, a term life insurance policy that covers the 20- to 30-year span when an individual is supporting his or her family is all a person should need. Since the odds of a person in his or her twenties or thirties outliving a term life insurance policy are great, term life insurance is the least expensive type of insurance a younger adult can buy.
Consumers who favor permanent life insurance see a flaw in the term-life scenario: it does not take into account the possibility that a surviving spouse or family will need a death benefit to meet expenses later in life. For example, a spouse might develop a long-term illness or physical disability that prevents him or her from holding a job. If a person’s spouse dies after his or her term life policy has expired, the disabled person will not receive a death benefit and might not be able to meet expenses. Not all children are self-supporting, either. They, too, can become disabled through sports injuries, automobile accidents, or illness. If one of the family’s breadwinners dies after his or her term life has expired, the surviving spouse might not be able to maintain the family lifestyle on his or her own.
Standard term life insurance also fails to address the needs of people who remarry later in life due to divorce or death of a spouse. Term life policies taken out when a person is in her twenties or thirties may cover his or her first family, but many people find themselves starting a new family in their forties and even fifties, due to divorce or the premature death of a spouse. These middle-aged moms and dads with small children may find their term life policies expiring just as they have a new need for coverage.
Middle-aged people can apply for a new term policy, of course, but there is no guarantee that they will be insurable. If the person has gained a significant amount of weight or has developed a serious illness, insurance companies can refuse coverage to cover him or her, or the cost might be so high that it is not affordable. A person can purchase “renewable” term life insurance that costs more than a standard term life policy. With a renewable policy, the person can extend coverage without a physical examination, but he or she will pay more due to increased age. A middle-aged person will pay much more for term life insurance than he or she would have when younger, wiping out some or all of the cost savings realized during the period covered by the first term life policy. For example, a 50-year-old woman will pay $1,120 a year for a 30-year, $500,000 term life policy that would cost a 30-year-old woman $325 a year. A 50-year-old man will pay $1,475 a year for the same policy, while a 30-year-old man will pay just $395 a year. If the middle-aged consumers are overweight—as 66 percent of adults now are, according to the Centers for Disease Control—the policies cost much more than that. Being just 10 pounds overweight will cause premiums to increase 30 percent.
The only way for a younger adult to control insurance costs and guarantee insurability into middle and old age is to buy permanent life insurance rather than term life insurance. Permanent life insurance insures a person until they die, so it never expires. Once the premiums are set, they cannot be raised base on changes in weight, health, or age. Permanent life insurance costs more than term life insurance does early in life, but if a person has to renew or take out a term life policy later in life, it will cost more than a permanent life insurance policy taken out when a person is in his twenties or thirties.
Permanent life insurance also has a mechanism to generate savings, unlike term life insurance. Early in the life of the insured, the premiums of permanent life insurance exceed the cost of insuring a life. The insurer deposits the surplus amount (less fees and profit) into a savings account, then invests the funds. The funds in this account, known as the cash value, increase with each premium payment and as the funds earn a return. The earnings are tax-deferred. The insured can access the cash value by borrowing it, withdrawing it, or using it to secure a loan. The cash value can also be used to pay the premiums later in life, when the insured is on a fixed income. The cash value is also known as the surrender value, since the insurance company will pay this sum to the policyholder if he or she decides to cancel the policy.
Consumers who opt for permanent life insurance can choose between whole life insurance and universal life insurance. A third option, variable universal life, is a type of universal life. Both universal life and whole life types offer permanent coverage. Both accumulate cash value. Universal life allows the policyholder greater flexibility to change the terms of the policy than whole life does. With whole life, the death benefit is fixed at the time the contract is signed. The premiums remain the same throughout the duration of the policy. Cash value accumulates at a guaranteed, unchanging rate.
With universal life, the policyholder can adjust the death benefit to fit changing circumstances, such as a substantially increased family budget due to the birth of children or the purchase of an expensive home. Premium amounts can be changed, as well. Payments can be decreased in the event that an income earner is unemployed his or her business experiences a downturn. Premiums can be increased in good times to speed up the accumulation of cash value. The rate at which a universal life policy’s cash value accumulates varies depending on the performance of the insurance company’s investments. If her investments do well, the cash value will grow more quickly than the cash value of a whole life policy. If the investments do not earn a good return, however, the cash value could increase more slowly than the value of a similar whole life policy.
Universal life insurance offers permanent coverage, cash value, and flexibility of payments and benefits. Its cash value is tied to the performance of the insurance company’s investments, which can do well or poorly. Those who are not worried about being insured later in life might find term life insurance a better, less expensive option than universal life. Those who want permanent coverage with an unchanging premium and death benefit and guaranteed cash value might prefer traditional whole life. Those who want permanent coverage with ability to adjust the policy over time might decide that universal life insurance is the best way to handle the unforeseen changes of life.

A frequent contributor to online and print publications, Bradley Steffens is the author of twenty nonfiction books for children and young adults and coauthor of seven more. His newest book, Ibn al-Haytham: First Scientist, is the first biography to be published in English about the medieval Arab scholar known in the West as Alhazen.