Basics
Term vs. Whole vs. Universal Life: Start With the Problem, Not the Product
4 min read
Loading
Loading
Whole and universal life
Permanent life insurance is designed to stay in force for your lifetime, as long as the policy is funded as required. It combines a death benefit with a cash value component. Whole life and universal life are the two main forms. They cost more than term and have more moving parts, so it helps to understand how they work before deciding whether one belongs in your plan.
Cornerstone Capital is an independent life insurance brokerage, not an insurer. Carriers make underwriting decisions, and approval is never guaranteed. This form does not apply for coverage.
01The problem
Term insurance is built for needs that end. Some do not: a child who will need support for life, a final expense, an estate that will owe something at death, an inheritance you intend to leave whenever that day comes.
A policy that expires at 70 does nothing for a need that shows up at 85.
02The tool
Permanent life insurance pairs a death benefit with a cash value component and is designed to last as long as you do, provided it is funded as the contract requires. Whole life has fixed premiums and values set by the contract. Universal life is flexible, and that flexibility puts more responsibility on the owner.
Cash value is a feature of the policy with its own costs and limits. It is not a savings account and it is not money without strings.
03The mechanics
Whole life generally has a fixed premium, a death benefit and a schedule of cash value set out in the contract. Those contractual guarantees are backed by the claims-paying ability of the issuing insurer.
Some whole life policies are eligible for dividends. Dividends are not guaranteed and depend on the insurer's experience.
Universal life separates the pieces. Premiums go into the policy, charges for insurance and administration come out, and the remaining value is credited with interest under the policy's terms. Premiums and, on some policies, the death benefit can be adjusted within limits.
That flexibility carries responsibility. If too little is paid in, or charges rise, or credited interest is lower than assumed, the cash value can run down and the policy can lapse unless more premium is paid. Some universal life policies include a provision that keeps coverage in force if specified premiums are paid on time.
Cash value typically grows slowly in the early years, because a large share of early premiums goes toward the cost of insurance, policy expenses and commissions. Cash value generally grows tax deferred under current federal law.
Charges continue for the life of the policy. On universal life, the cost of insurance generally rises as the insured gets older.
Many permanent policies apply surrender charges if the policy is given up during an initial period, which can last many years. The amount you would receive on surrender can be well below the premiums paid, especially early on. Permanent insurance is a long commitment.
Most permanent policies allow loans against cash value, and some allow withdrawals. Loans accrue interest. Outstanding loans and withdrawals reduce the cash value and the death benefit.
Withdrawals and loans can have tax consequences, particularly on lapse, surrender or modified endowment contract status. A policy funded beyond certain federal limits becomes a modified endowment contract, which changes how loans and withdrawals are taxed. Treatment depends on your circumstances and current law.
What you may have heard
You can borrow your own money any time and it costs nothing.
Whole life is always a bad deal. Buy term and invest the difference.
Concept names decoded
Names you may have heard for what is on this page. Open one to see what it is and what it does not promise.
This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.
Questions to ask
This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.
Questions to ask
This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.
Questions to ask
Advanced planning concept, coordinate with tax and legal professionals
Questions to ask
04Trade-offs
05Fit
We are an independent brokerage, so we can look at more than one carrier, subject to appointments, product availability, licensing and eligibility. We ask about your situation first and explain the trade-offs. Keeping what you have is a fine outcome.
Important to know
Contractual guarantees are backed solely by the claims-paying ability of the issuing insurer. Dividends, credited interest above the contractual minimum and other illustrated non-guaranteed values are not guaranteed.
Loans and withdrawals reduce cash value and death benefit and may cause the policy to lapse. Tax treatment depends on your circumstances and current law. Cornerstone Capital does not give tax or legal advice.
Approval is never guaranteed. Eligibility and premium depend on age, health, underwriting and the issuing carrier's criteria.
Next step
Your main objective, your time horizon and a funding comfort range. We look at whether permanent coverage belongs in the plan at all before comparing any.
Or call (501) 476-1468