Katt & Company is a fee-only life insurance advising firm. We work with clients and top estate planning experts throughout the U.S. Peter Katt is a regular columnist for the Journal of Financial Planning and the AAII Journal, and is quoted frequently in the Wall Street Journal, Forbes, and by other highly rated financial news sources.
Whole Life / Universal Life Premium Differences
While Minimally funded whole life and universal life may appear to be the same, there is a very significant difference that could produce huge savings by using UL.
I was retained to review a large amount of life insurance and proposal for a new policy for an entertainer. Let's call her Bri. The existing coverage was in the form of minimally funded whole life, meaning the dividends were used in combination with paid-up additions and term insurance to keep the death benefits level. WL is a current assumption policy in that the dividends change with bond yields from a large portfolio. The proposal was complex and contained enormous danger. I rejected the proposal immediately, but recognized that the WL policy does not have premium flexibility whereas current assumption UL does.
WL must stay on track to endow at maturity (age 100 until eight years ago, now 120), meaning the cash value will equal the death benefit when it matures. This is why it lacks premium flexibility. If premiums are not paid, a loan is created and this reduces the death benefit by the loan balance. UL has no premium requirement. As long as the policy remains in-force, missed premiums don't reduce the death benefit.
If Bri were to fall prey to a terminal disease in, say, 25 years such that it was conclusive she wouldn't live another decade, premiums for the UL policy could be stopped as the policy would have enough cash value to pay the insurance costs during Bri's remaining years. Say the premiums are $150,000 a year and Bri dies in seven years after diagnosis. The UL cost would be $1,050,000 less than the WL. (Think Farrah Fawcett - diagnosed with terminal cancer in 2006 and died 2009).
Therefore, while it may seem similar to a lateral move to replace the WL policy with UL it isn't. In this circumstance there is no downside to UL and a possible huge advantage.