Listen to this podcast and better understand Universal Life Insurance and the risk assumed by the policy owner. Discover why basing your financial foundation on guarantees which are maximized in a properly designed Whole Life product is of such importance to you and your financial well being.
Tom: Welcome to Wealth Talks where we talk about solutions, money and other things that create wealth in your life. John, it’s a bright, sunny day here in Las Vegas and we’re excited to be here, aren’t we?
John: Yes, we’re excited to be back on Wealth Talks this week, and this week we’re going to talk about some of the differences between Universal Life and Whole Life. These things come up here and there as we go through – talking about these podcasts and these episodes, and so we talk about these things from time to time but I was noticing it’s been a while since we talked about Universal Life Insurance and some of the differences, some of the important differences between Universal Life and Whole Life and what that can mean for your future.
Tom: I think it’s a very good opportune time to talk about this because the market is rising with the Trump administration coming in, the Dow went over 20,000 today and that’s a record and, you know, the SNP 500 is just trying to break a new high and people are excited about that and they think that by jumping on board the new index Universal Life that actually tracks these indexes that they’re going to make it rich. And so we need to be really careful about that because, you know, first of all, everybody that knows anything about life insurance knows that you don’t get the full return of the index that you’re tracking and a newer product. There’s a cap. And that cap is put there for a very specific reason. It’s put there because the insurance company wants to keep that profit.
John: Yes, and any universal life product, whether it’s indexed Universal Life, variable Universal Life or plain vanilla Universal Life, all of it is based on transferring some portion of the risk of the policy back to the policy owner which was the whole concept of insurance to begin with.
Tom: It was.
John: So really where that starts is in the basis of the Universal Life product itself, Dan fully talked a little bit about that on our podcast last week.
Tom: He did.
John: When we had him as a guest.
Tom: And that’s really important to realize. So let’s go back in history and let’s discover how Whole Life actually came about in the first place because, you know, when someone pays their automobile insurance and they have an accident, they want to get their claim paid, don’t they?
John: Of course.
Tom: If I’m buying home insurance, which we do, and someone goes by and throws a bricks for my front window, I want my window replaced. I have a fire, I want my house replaced. If I, you know, if someone comes onto my property and trips, I want them to be taken care of medically, I don’t want to have to pay that out of my pocket. That’s what insurance is for, it’s to avoid the risk. Well in life insurance, the only risk is me dying. And if I die, and I have nothing, I’m not here, I don’t get a payout. Somebody else does, and so people said this isn’t right. We need to have something while we’re living to make sense. So up until that point, the only thing that was sold was renewable term insurance. And tell our listeners what renewable term insurance is, John.
John: Sure. So the term insurance comes, the basic of all term insurance policy starts out with one year renewable term, which means that you pay a premium, you’re covered with insurance until the next year, and then you pay a higher premium because each year you live, you’re more likely to die. So the premium keeps going up year by year and as you get older, it becomes very expensive.
Tom: Now I don’t see very many of those policies anymore but I just reviewed someone’s the other day.
Tom: And he thinks it’s a great policy and he’s going to have one year renewable term policy until he’s 68. And he’s 38 right now. And in that time period for the coverage he’s going to get, he’s going to pay over $68,000.
John: Because that’s increasing premium.
Tom: The next type of insurance that came in as a level renewable term product.
John: And that’s where they take an average all of those together.
Tom: That’s right. And so, when we put the same amount of coverage on this gentleman,38 year old gentleman and covered him until he was 68,he only paid $32,000 for the same coverage.
John: Instead of?
Tom: Sixty eight?
John: Sixty eight. That’s quite a difference.
Tom: So one year renewable term insurance is the most expensive insurance that’s out there. Now, let’s get into the Universal Products because, you know, that’s what Universal Products are based on is, one year renewable term or maybe five year renewable term. But before we do that, why did Whole Life insurance come in?
John: Whole Life insurance came in because people said well you’re basically renting the insurance with term coverage and it’s a known fact that 99% of term policies never pay a death benefit because people drops the coverage before they’re really more likely to die. So people said, well this isn’t like other types of insurance like home insurance and car insurance where the insurance will pay if something happens. With life insurance, it’s really not a matter of if, it’s a matter of when. And so the insurance industry was pressured to come up with a product that would build equity. It’s kind of like you pay a mortgage on your house and it starts building equity in it. And so the amount of equity in the contract at any one time would be the amount of risk that the insurance company was no longer taking. And when all of the risk was covered, when the policy in Dow, say age 100, then the amount of equity in the contract would be equal to the death benefit and there would be no risk whatsoever.
Tom: And the nice thing about Whole Life is that the death benefit got bigger every year.
John: Yes, it can.
Tom: In a participating policy, it does because when the insurance company makes a profit and it’s a participating Whole Life policy, the profits above and beyond the cost of running the insurance company and the mortality costs like Dan Foley was talking about last year are paid back to us policy holders as dividends and that dividend buys more equity in the policy.
John: If we have that dividend option.
Tom: If we select that dividend option.
John: That’s right.
Tom: So Whole Life, participate Whole Life was actually really a consumer demanded-product. It wasn’t something the insurance companies really went out to design. Unlike term insurance, which was completely set up by the insurance companies, and then Universal Products which were really setup in response to people that were saying buy term and invest the difference.
John: Yeah. Universal Life became very popular in the 1980 when interest rates were so high because the people – Universal Life has an interest rate based products. And so people saw the slow steady gains in the Whole Life and that didn’t look so great compared to the 20% interest that they thought they could earn in the market in the ‘80s. Now those rates haven’t stuck around today and so what happened with all the Universal Life policies that were designed based on those high interest rates back then is that they required more premiums to be paid by the policy holder in order to cover the difference. To understand that, we need to talk about the other part of Universal Life Insurance because we talked about the one year renewable term, all premiums above and beyond the one year renewable term premium in a Universal Life policy go into something called the side fund. And that side fund is meant to offset the ever increasing cost of that term insurance. So as the insurance becomes more and more expensive, the extra dollars that you have saved in the side fund and been earning that rate of interest called the crediting rate, then that pool of money can pay the ever increasing cost of term insurance.
Tom: They hope.
John: That’s what didn’t happen.
Tom: That’s what didn’t happen.
John: People didn’t put enough in to the side fund to the Universal Life in order to cover the term premiums. They were expecting the interest rate to do too much.
Tom: There’s something that takes place in Universal Life, all Universal Life policies, it’s called accumulated cash value and that’s not to be confused with the surrender value or cash value and the Whole Life policy. The surrender value or cash value in a Whole Life policy is your equity. The accumulated cash value in a Universal Life policy is just extra money you’ve paid to the insurance company, the whole, the offset premiums in the future or to be invested in this interest bearing siding accounts that you’re talking about.
John: Right, either the IUL index or the UL and actual stocks and mutual fund accounts.
Tom: And so one of the things that Universal Life salesman will also say, well you get the death benefit and the cash value with Universal Life. And that’s really –
John: It can’t be structured that way.
Tom: And that’s like saying you’re going to get part of your premiums back plus the death benefit. Well, that means they overcharge you for your premiums, okay? And so we have to be really careful about the finding terms here so people really can compare apples to apples.
Tom: So let’s talk about some of these products, you know, I haven’t seen a variable life insurance product for a long time either and it so happens this guy that had this one year renewable term, he’s got like four variable life insurance policies too.
John: Okay. Now, that’s different than variable Universal Life, isn’t it?
Tom: It’s variable Universal Life.
John: Oh, it is. Okay.
Tom: And it’s variable because they say, “Well you don’t have to pay all the premium this year, but if you pay this premium every year for the whole contract, then your contract will be guaranteed up to a certain point in the future.” So that variability makes the person buying the policy think that they can get away with paying less at times. And when they pay less at times, then the product is not going to be guaranteed as long because, you know, that one year renewable term has to be paid inside that variable product. And if they don’t pay it, there’s not going to be as much money in the accumulated cash value to be trading in equities or mutual funds or wherever that side fund is invested at.
John: Yeah. So all of those risks not funding the contract enough, not having a big enough return in the market when you’re expecting it, all of those things combined are some additional risks that a Universal Life policy owner take. There are also risks that the insurance company can impose on the product, in the form of changing the cost of insurance a little bit. If they can justify a cost of insurance increase, Dan Foley talked about that last week when he was talking about the higher interest rates in Universal Life back in the day and because the guaranteed rates on those products were so high, today the insurance companies are looking at those products and saying, “Well, our investments aren’t doing quite that well, so how can we justify an increase to the cost of insurance?” And those factors can be changed in most Universal Life products, whereas with the Whole Life insurance contract, you have a foundation that is fixed, that’s guaranteed with a cost of insurance has already been worked into the values.
Tom: The other thing with Universal Life products whether it’s this regular Universal Life that’s on an interest rate on the accumulated cash value, or whether it’s a variable Universal Life product that got it’s accumulated cash value invested in stocks or mutual funds, or if it’s Indexed Universal Life insurance product that’s got its accumulated cash value tracing an index like the SNP 500 or the Dow or something like that, all of these products have fees, fees in addition to the premium that you’ve paid.
Tom: That is so different than Whole Life and I was looking at a couple of IUL products, Indexed Universal Life products just this last week where we were reviewing them, and the fees on that were greater than what the profits were that they were getting off their cumulated cash value.
Tom: So, it made no sense, you know, this one couple, they were Life Insurance Agents, and they bought into the IULs and their fees in one year were $900.
Tom: On a very, very conservative premium and they were just shocked because they were told that they could never lose money in the market. Well, that’s true, you can’t lose money in the market but you can certainly lose money from the fees that the insurance charges you to manage all that for you.
John: And how can they say that they cannot lose money in the market? Is there a guaranteed minimum?
Tom: There’s a guaranteed minimum but that minimum is like one, maybe two percent, but the cap on the market is like 10,12 maybe 15 at the most that I’ve ever seen. And so if the fees amount to be more than the interest rate off the market they were getting, they end up losing money.
John: Lose money, and the cost of insurance can factor into that too because the cost of insurance can often be taken out after the guarantee.
Tom: Now, that’s one thing that Whole Life can happen.
Tom: Number one, the cost of life insurance and Whole Life product is guaranteed level for life. That’s your entire life, not until you’re 65 or 70 when you’re probably going to die like most Universal Products are. Okay. Number two, the fees associated with Whole Life insurance are fixed and they are already part and figured into your premium payment. Most life insurance policies we sell have a $75 fee. That sure beats the $900 fee I saw on a UL policy the other day or $564 fee on variable universal policy. You know, and so working with fixed guaranteed numbers gives you a way to plan for the future, whereas if we’re dealing with a universal product that can have erratic fees, variable fees, flexible fees, and of course, those terms are all used to market to you that you don’t have to pay your premium in a fixed way, it can be variable or flexible, but actually, it’s what it’s doing is saying, “Hey, we’ve got all this latitude on the company’s side that we can stick it to the owner of this policy any time we want to.”
John: Yeah. It’s transferring the risk, long story short, it’s transferring the risk from the insurance company back to the policy owner in some degree or other.
Tom: You know, something not too long ago, we were sitting in our office and we were talking to a gentleman from one of the major insurance companies that we represent and he’d been in the insurance industry for almost 45 years. And he said, “It just makes no sense at all to me why Universal Life Insurance are sold today.”
Tom: It always puts the risks back on to the owner of the policy and to me, that’s just counter-intuitive to why you buy insurance in the first place.
John: Yes. And another thing about the guarantees, especially the guaranteed minimum rate Indexed Universal Life insurance especially if you read the contract on any Indexed Universal Life product, read it through with a highlighter and highlight all the places where the insurance company can change certain elements. Oftentimes, all you have to do to forfeit some of the guarantees is to make a late premium payment which can be very probable over the course of 40 years.
John: Especially if you’re on a monthly draft or monthly premium. I mean, having a late premium in there somewhere is not out of the question.
Tom: Well, you know, just think of your credit card, you know, we’ve been using credit cards – in my life, I’ve been using credit cards for, my goodness, almost 40 years now and, you know, there have been times that I’ve been late with a payment by a day or two simply because of the mail or went out at a different time or sometimes I’ve actually forgotten the date that the credit card is due. Well, one incident of that – well, in most IUL contracts can void –
John: The guarantees.
Tom: All the guarantees.
John: There you go.
Tom: And so, you know, any time you look at a contract, I tell people, if it’s really thick, and it was written by somebody else, you know some attorneys were working for that somebody else not you.
Tom: And that’s why an IUL contract is so much thicker than a Whole Life policy contract. Whole Life policy contract is very simple, it becomes a unilateral contract that only you, the owner, can alter. You can alter it in two ways, you can refuse to pay the premium, you can refuse to pay the interest on the policy line. If you refuse to do either one of those two things, then the policy can do different than what it was guaranteed to do. The insurance company can’t change it at all once this contract is signed. After the two years of contestability, they can’t even contest the fact that if you put false information on the contract, okay? But a Universal Life policy gives the insurance companies many ways to contest having to pay what they promised or even the death benefit. So, you know, this is a good discussion and Dan Foley, like you said, brought it up in our last podcast about interest rates and things like that, Universal policies and the risk that the owner of those policies assume, and, you know, this is not something to be taken lightly. It’s something that, you know, we want our clients to be comfortable with what they’re getting into. And many times people don’t move forward because they simply don’t understand the terms around life insurance. And how many times have we gotten a prospect or a new client calling us and saying, “Oh I’ve got Whole Life insurance, I was told the Whole Life insurance and we’ve come to find out it was one of these three, you know, three types of the Universal policies.”
John: It happens. And so that’s the good news that people who are working with us, they don’t have to understand all of the terms in the products, how all of the different products work. If you’re working with McFie Family Insurance, you can rest assured knowing that you have a product that has been designed, with all of this in mind, that’s going to be good, that’s going to give you the guarantees and the foundation that you’re looking for. And even though we talk so much about the difference between the products, keep in mind that it’s the most important thing is what you do with it.
Tom: It is.
John: And so once we have this foundation in place, using the perpetual wealth could put it to work in the different areas of your life. Putting your focus there is going to give you the better results than just focusing on what the insurance product itself can do for you. We’ve already designed that for our clients in the very best way possible.
Tom: Well, it’s always fun to review other people’s policies that they own already because, you know, when do you want to find out that you’re losing money, today or 10 years from now?
John: Always today.
Tom: Always today. Gives us the option on the table of making the right decision. Now, sometimes when we get a client that owns a Universal Life policy, they’re really close to the end of the surrender fee period because all these Universal Life products, they have a surrender cost. So if you let the policy lapse and not pay the premium or you surrender the policy in the first – at least 10 years, sometimes 15 years, then the insurance company is going to take a lot of your accumulated cash value back from you. They’re not going to give it to you. And that’s really interesting because between eight and 10 years, usually on a Whole Life policy, the surrender value is greater than what you’ve paid in premium, whereas on Universal Life, you’re going to get penalized if you send that policy back in that same time period. And so it’s very important to understand those facts because when we are helping someone move forward and plan for their future, we want to make sure that we keep all their opportunities on the table and not take them away right from the very get go. And that is one of the reasons that we never use Universal Life policies.
John: Yes, that’s right. And so if you have Universal Life product or you have a product that you’re not sure how it’s been designed, you’re welcome to contact our office and get a review of that product. And you can call us at 702-660-7000 to do that.
Tom: Yes, and we love to do that. It’s an educational process for many people. Many people don’t know what they’ve had. They’ve been told they’ve been sold a permanent life insurance policy, and they believe it’s Whole Life when it’s actually Universal. So we’re happy to review those, we’re happy to review your term policies to see if it’s one year renewable term like the gentlemen’s that we looked at this last week. We can save you a lot of money typically on even most-term policies.
Tom: But ideally, we focus on making sure that our clients get involved in a product that’s comfortable and affordable for them, that they’re protecting their liability to their family, to make sure that their income is replaced and –
John: That’s important.
Tom: It is. And that they are having a tool, a financial asset called Participating Whole Life insurance that allows them to manage money so that they can keep more of what they’re making in the future.
John: Yes. So that’s so important. And some people listening to this podcast probably think that they’re not in a place where they’re ready to start using Participating Whole Life insurance policy yet. And so, those people definitely need term insurance if they want to leave the world a better place because life insurance is a way to leverage everything and improve it that much more, as a slight edge on everything that you do, and really it’s sometimes a big edge for the next generation. And so you can call our office to get term insurance as well. We work with term insurance and Participating Whole Life insurance, that’s what we help people with. And to read more about the different types of life insurance, you may want to check out our website. You can go to life-benefits.com, go to the blog tab and there’s a drop down into the blog menu slot types of life insurance and you can read more about the different types of life insurance available today.
Tom: Well, John, life insurance definitely is one of the ways to create wealth in people’s life. And I can’t even begin to express the emotion that I feel when there is a death benefit that we have to deliver. And the resources that that puts into the hands of people who have lost a loved one allowing them to continue on with a lifestyle that would have been impossible if that liability hadn’t been covered through life insurance.
Tom: And then just recently, we’ve had people that we know that have passed that didn’t have life insurance. And to see the struggle in the financial turmoil that those people go through because someone didn’t know or was afraid to talk about death. Now, statistically, 85% of Americans know they need more life insurance. But 57% of them don’t want to talk about death or they don’t understand the terms or they, you know, they think it’s going to be too expensive. And if you’re one of those 85% out there that know you need more life insurance but maybe you’re afraid to talk about death, or you’re afraid that it’s going to cost too much, or that you don’t understand the terms, give us a call. 702-660-7000. We’ll be happy to make the terms comfortable so that you understand exactly what you need and we will make it affordable as well.
John: That’s right. All right, so that was a good session on Universal Life insurance and Whole Life insurance, we even talked a little bit about term insurance today. So again, you can check out our website to get more information about the different types of life insurance, or call us at 702-660-7000. You all have a great week and we’ll be back next week here on Wealth Talks where we talk about solutions, money and other things that create wealth in your life.