The Difference Between Term, Whole, and Universal Life Insurance

What the difference between Term, Whole, and Universal Life Insurance? Doug Andrew will explain the history of life insurance and how you can utilize them for your specific purposes.

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Let me give you a very simple explanation of life insurance, the history behind it, and the three types: term, whole life, and universal life.

Let’s say that we look at a mortality table from the time a baby is born until they finally passed away. This mortality is measured by the commissioner standard ordinary table where they measure the deaths per thousand at every age, starting at age zero, up to age one hundred, one hundred and ten, one hundred and twenty.

We know that clear back in 1958; that was a very popular mortality table. If you took a one thousand thirty-year-olds in America, there were 2.13 deaths that year per thousand thirty-year-olds. Every year we get older, there’s more of the thousand people that are dying because of accidents or illnesses or whatever.

So let’s simplify this. If we wanted to provide a $1,000 death benefit to help the beneficiaries (the widow, the orphans, etc.). Of those two out of one thousand thirty-year-olds that were going to die that year, and we passed a hat around the room to the thousand people, how much would everybody put into the hat so we would have $2,000 to pay to the two beneficiaries.

Well, the answer is two bucks. Everybody chipped in two bucks. We now have $2,000. So when the two thirty-year-olds die, we have $2,000 to pay out. That’s term insurance.

The insurance company calculates term insurance, based upon the mortality table, how many deaths per thousand. As you get older, you have to donate more money to the hat.

Pure term insurance goes up in price every year because more and more people are going to be passing away per thousand. By age sixty-five, it used to be, that probably a third of American males had died or had a serious problem.

Now, mortality is extending. So term insurance is just the pure cost of insurance

Well, whole life insurance was designed to not have to keep paying higher and higher and higher premiums. What could we pay at a level premium that would cover us for our whole life?

And so they would calculate maybe by age 65 or whatever.

Well, how much would we need to pay a level premium? Maybe we might have to pay ten or twenty times that. But we pay a level premium for our whole life, and we give that to the insurance company.

They’re just like the bank (the hat holding the money), and they invested it and have to keep it safe. That is a level premium.

So what’s happening is you’re way overpaying the actual cost or the actual amount you would have to put in that hat in the early years, but you’re underpaying the latter years. What happens after age sixty-five is you keep paying that level premium. You still get covered, even though you’re not paying near what you should be at that point.

Because you overpaid the early years and that money has accumulated equity, or cash value with the insurance company.

Now after just straight whole life was created, a lot of times people said, “Well, I don’t want to pay any more premiums for my whole life.”

So what happened is they said you can pay a little bit more until age sixty-five and you can stop. Now you’ve overpaid enough that you don’t have to pay any more money.

“Well, what about twenty years, or ten years? What if I just paid one lump sum? How much would I have to pay in one fell swoop to never have to pay another premium?”

That is so much money in the insurance company’s coffers, that the interest on that, based upon your life expectancy will, cover you for your whole life. Okay, so that’s whole life insurance and it’s based upon how many years of premiums you want to pay in a level amount or a lump sum.

Well, back in 1980, E.F. Hutton was the brainchild behind the third type of life insurance, universal life. Now, it got its name because it is universally applicable to two different objectives in general.

One, you could get away with paying a little bit less premium than a lot of whole life back because your rate of return on the insurance cash value was actually a little bit higher than the normal rate of return or interest being credited, or dividends, in a whole life policy. This was back in 1980; interest rates were high.

So if you wanted to just have death benefit, you could probably get away, instead of paying this much money, you could pay a little bit less.

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