WL or UL? Depends on the client

The question of whether a client belongs in a universal life policy or a whole life policy is complicated by a few different facts and factors these days. Some advisors have their preferences, people have their own ideas, sometimes their own misconceptions, and even markets today are influencing opinion about each product.

Universal life policies were introduced in the 1980s when the high single digit returns being delivered by participating whole life policies didn’t look nearly as attractive compared to interest rates. Today, with high volatility being the norm, people are now coming back to the promise of lower risk and lower volatility offered by whole life.

When it comes to client perceptions and misconceptions, past history is influencing things too: It was not long ago that companies were being sued because poor dividend returns made whole life “vanishing premium” plans blow up. Instead of dividends properly paying up a client’s premium costs, people found themselves on the hook to pay for many more years than planned into their policies in order to maintain their coverage.

What’s more, Brian Gribben, senior partner with Wealth Strategies Group, says “too many advisors have tried to sell whole life insurance on the basis that it’s a really good investment for clients. It’s not.” Although he says it’s an excellent product for meeting permanent life insurance needs, one that delivers good value in a long-term sense, he says from an investment point of view most clients know or think they can do better by putting their money elsewhere.

“In many cases this is a true statement but they can’t do better from an insurance standpoint anywhere else,” he says. “It’s a good tool to allow people to spend all of their retirement assets because they’ve got the whole life insurance to replenish those assets when they die.”

In universal life meanwhile, some clients still have bull-market memories (and bull-market marketing campaigns?) on their mind – some report entertaining clients who have notions that whole life is a bad investment, but that universal life is some magical fantasy policy that will do great things in the future.

Take the investment quality bit away for a moment though. What really matters, says Allen Wong, president of Allen Wong & Associates, is that clients have adequate and appropriate coverage. Life insurance needs are presumably the reason they’re likely looking at both products in the first place.

The choice between either product is not nearly as cut and dried as is once was, particularly given that product evolution has made it so that both policies have several similar qualities – both can now be overpaid if the client has extra money for savings, for example.

Depending on who you ask, a client’s age, income and their ability to save, their investment knowledge and their long term goals for the product all play into the choice to varying degrees.

Examining universal life

Gribben, for example, generally doesn’t sell whole life to anyone over age 55 since the product usually needs to be in force for a longer time in order for clients to realize the policy’s full value.

If a client is older and there is a permanent life insurance need, he sets up a universal life policy and uses a daily interest account for accumulation. “I typically don’t expose anybody to stock market risk within their life insurance policy after age 55,” he says.

There’s a very good reason for this. If markets go down while clients aren’t paying attention, the policy’s value can be depleted faster than just about any other investment. “We call it reverse dollar cost averaging,” says Wong.

Where the value of a mutual fund’s units might drop, clients still own the units when markets rebound and their value is (hopefully) restored. A universal life account on the other hand, is withdrawn from regularly to pay insurance premiums, which means units held in an untended policy on autopilot will inevitably be sold at a loss or a low point.

Whether or not clients use a level cost of insurance or a yearly renewable term (YRT) contract within their policy is another item to consider when buying universal life: For a younger client, cheaper YRT premiums can be attractive. “The downside of that in the long term, the insurance can become prohibitively expensive,” says Gribben. “In the early years when the client is putting money in a lot more is building up in savings because the cost of insurance is low. If they live to be 75 or 80 (though), the cost of insurance in that structure eats up all of their cash value in a hurry.”

Universal life is preferred by a lot of people because it is so flexible – clients can choose when they want to fund or over fund their policies. Many like it because they can see cash values building up early. David Wm. Brown, partner at Al G. Brown and Associates, also points out that if they are savvy enough to manage the investment portion of the account (and be aware of the fact that insurance premiums will erode value if there’s not additional money on hand to fund the policy during down years) it is possible to earn better returns this way.

That said, commitment to the policy – making payments and being committed to monitoring performance is the third concern for advisors and their clients to think about.

Considering whole life

At the other end of the product spectrum, advisors say they use whole life policies with clients who are good about saving, who have the means to afford the more expensive premiums, with those who are comfortable with the company’s track record of paying dividends (assuming they’ve bought into a participating policy) and who want to avoid risk and investment volatility, or for juvenile polices where there’s obviously a long period of time to work with and it’s unknown if the policy holder will have any interest in managing an investment account later on. Whole life is also considered to be more attractive to banks if clients plan to use the policy as collateral for a loan in the future.

Whole life decidedly less flexible – although it is possible to overfund the policies, premiums need to be paid each year without fail. There is no investment portion of that clients can control – this responsibility stays with the insurance company.

Dividends in a whole life policy can be paid out as income, can accumulate in an account, can be used to offset premiums so clients only need to pay up until a certain age, can be used to diminish premium costs each year or can be used to grow the policy face value while premiums remain the same.

If the client has an immediate need for more insurance than they might be able to afford under the whole life plan, the dividends can be used to purchase additional term insurance as well.

Gribben says if long term planning is the name of the game though, he prefers to have the dividends reinvested so the policy’s face value increases.

“The $250,000 policy could grow to be $700,000 or $750,000 in 30 or 40 years. For the same premium you can give clients $250,000 of whole life but add $250,000 of term insurance onto the policy using the dividends,” he says. “So the client actually has $500,000 right from the outset but they’re bleeding off a bunch of the money each year that was going to build the policy savings.”

In short, says Brown, it depends on whether the client is looking for the product to generate income for them or if they’re looking to the product for its death benefits. “None of these products are a panacea for everything. You really need to look at what the person wants to accomplish and what their risk profile is in order to match them up with a particular product.”