Whole life:
1) Level premiums until the policy expires when you are at age 100 or when you die, which ever is earlier. If you live to age 100, the company will pay face amount of the policy to you.
2) In first 2 years, all premiums goes toward the insurance company, which most of will be paid to agent's commissions.
3) After the first 2 years, a portion of your premiums goes to the insurance company and the rest into the cash value.
4) Cash value typically accumulate annual interest of around 3%.
5) If someday you want to take money out, you can borrow it and pay loan interest of 8%. If you die someday while there's a loan due, the loan amount plus interest will be deducted from the face amount of the policy. If you cancel the policy while there's a loan balance, you will be responsible for income taxes on the loan.
6) If you die someday, the company will pay the face amount (minus any loans, loan interest, and missed premiums) to your beneficiary. All the cash value goes to the insurance company.
Universal Life
1) You are typically given 2 ranges of premium you can pay. One of them is called "minimum premium." Before I said an average 30 year old would pay $1000/year for $100,000 coverage. The minimum premium would be much lower. It will probably say $500/year. The other is called "target premium" The premium would be about the same or higher, so it will say about $1000/year.
2) Premium payments are flexible. You maybe able to skip premiums as long as there is enough cash value to support the "minimum premium."
3) Your premiums are paid for 3 things: The insurance, the cash value, and administrative fees
4) Your cash value has a guaranteed fixed interest between 1-3%.
5) While premiums remain about the same in the beginning, the internal cost of your insurance goes up every year. That means less and less of your premiums goes toward the cash value. Eventually, all your premiums is going toward the insurance and after that, your premiums will go up. If you don't pay the higher premium, then the cash value will be used to pay for it. If the cash value is about to be depleted, will get a letter saying you are in danger of having the policy lapse if you don't pay a certain amount of premiums.
6) At the time you apply for this life insurance, you are given two death benefit options. Option 1 or Option A will either pay the death benefit or the cash value, but not both. Option 2 or Option B will pay the death benefit and cash value for an extra added cost to your premium. Most people switch from Option 2 to Option 1 because the cost of having this insurance becomes too great in the future.
7) As with whole life, same borrowing features. You can borrow it and pay loan interest on it.
As you can see, both of these types of life insurance are horrible products. I personally believe that no one needs life insurance for their entire life. The only reasons why someone would consider getting life insurance is
1) They don't have enough savings AND/OR
2) They have kids dependent on his/her income AND/OR
3) They have debts to pay.
Therefore life insurance should only be used to replace your income in the event that you die. So I recommend everyone to buy term insurance and put their savings somewhere else such as bank accounts, Roth or Traditional IRAs, retirement plans at work such as 401(k), and other areas besides life insurance.
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