Term, Whole Life, Universal Life
How Do They Work?

Term had premiums that increased annually, or every 5 or 10 years, or would remain level, but coverage would decrease each year.

In the old days the only life insurance products available were "whole life" or "endowment life". These contracts were designed to accumulate cash value build up. As the year’s progress and new types of investments materlized, so did new insurance products. Term life was developed to allow an individual the opportunity to acquire more coverage, which had less of a cost then "whole life or endowment life" contracts.

Term was designed to provide either decreasing or level coverage. Most term products were attached to a "whole life or endowment" contract. This allowed the insurance companies to continue to promote whole life and provide additional coverage that was affordable. Insurance agents packaged such plans as explained below.

An individual one could obtain $50,000 of coverage for an annual premium; let's say of $300.00.

This was achieved by preparing the coverage to provide $10,000 of whole life coverage with a $40,000 term rider! The $10,000 whole life portion would accumulate cash values BUT the term would not and never will build cash values.

The term rider would last for a specific amount of years. Depending on the way the policy was designed determined the premium. For example:

A decreasing term rider could provide $40,000 of coverage but would reduce each year down to zero, while the premium would remain fixed.

A term rider could be arranged so that the $40,000 would remain level but every 5 years the cost of the term rider would increase.


Is a product developed so that an individual can purchase a specific amount of life insurance coverage and maintain a permanent premium? Whole life builds up cash values, and most contracts declare dividends.

Whole life provides a benefit to age 100. Whole life is designed so that at age 100, the cash values equal the life insurance coverage. Dividends could increase coverage depending on how they are credited. Any loans from the cash values can have an effect on the death benefit, and could have an effect on dividends. (Refer to the loan and cash value section).


Is a product developed to provide an individual with options to create his/her own type of coverage? Universal life is designed to have what is called a mortality cost. This mortality cost is basically a term policy that has an internal increasing cost. Five (5) components make up a universal life contract and they are:

Amount of coverage
Interest rates
Cash value

The best way to describe universal life, is using the example below:

Let’s say an individual who is 30 years old is interested in obtaining a $100,000 of coverage and would like to have $50,000 of cash values when he/she reaches the age of 65.

To achieve his goal would require a broker to illustrate what premiums would be required using a current and projected interest rate to achieve his goal. For example:

Using a hypothetical interest rate of 6.0% for EACH AND EVERY YEAR the annual premium might be $1,200. The reason “EACH AND EVERY YEAR” is in capitalized is to emphasize that the 6.0% interest rate would be required “each and every year” to achieve his/her goal.

A reduction in interest rates would cause the individual to increase his/her premiums to achieve his/her goal.

An increase in interest would provide him/her with the option to reduce his $1,200 annual premium to achieve his goal. Alternatively, he could continue to pay the $1,200, which would increase his values at age 65.

Common Mistakes Regarding Estate Planning
Cash Values/Loans
Most consumers who purchase a contract that provides cash values are unaware of how the process works. This is a very important section and should be not mistaken.

How cash values are treated when borrowing, or if they remain inside the whole life policy:

1. The cash values are “NOT” added to the death benefit, but are included.

2. Loans on the cash values and loan interest are subtracted from the death benefit.

3. When borrowing the cash values, the insurance company declares a loan interest rate. The loan interest is required to be paid once a year on the anniversary date of the contract.

4. This loan interest if paid by you, or from the value of the contract is never applied to reduce the loan.

5. If you do not pay the loan interest each year, the loan interest is added onto the loan, thereby compounding the loan and further reducing coverage.

6. When generating a loan, any dividends declared by the company could be reduced.

Here’s the best part, If you leave the cash values inside the whole life policy, the insurance company does “NOT” add the cash values to the death benefit, but includes them. It’s a win win for the insurance companies. If you borrow the values they charge you loan interest and subtract the loan plus the interest from the death benefit, BUT if the cash values remains in the contract, the insurance company does not add them!


Let’s say you have a $100,000 of coverage from a whole life policy with $50,000 of cash value (excluding any dividends. Dividends are paid in addition to the death benefit, unless surrendered or applied in another manner).

Upon your death only the $100,000 is paid to your beneficiary “NOT” the $150,000!

On the other hand using the same $100,000 scenario above, you now have a loan of $50,000, with interest that was due in the amount of $1,000.

Upon your death $49,000.00 is paid to your beneficiary!

Under universal life the same is applied with a couple of variations. Universal life can be arranged so that “BOTH” the cash values and the death benefit will be paid to your beneficiary upon your death. Loans are treated the same as whole life.

Let me remind you as stated above in the universal life section, any deviations from the five (5) components outlined, will have an effect on the outcome of the policy and could prevent the universal life contract from achieving your goal.

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