Why do we See more Income from Universal Life Insurance than Whole Life Insurance?

We make a lot of comparisons at The Insurance Pro Blog and whenever and even more behind the scenes at The Salus Agency. And one of the biggest questions that consistently comes up from some of those comparisons has to do with the gap between income projections for universal life insurance and whole life insurance.

So what gives with the disparity between these two products? Do the universal life carriers lie? Or is there something else underlying the situation that explains this difference?

Life Insurance is Life Insurance…Unless…

We’ve said before that life insurance is life insurance. So any attempt to suggest that there is some wild difference behind the expenses one is likely to incur when it comes to universal life insurance vs. whole life insurance is entirely fiction. The whole life companies are not in possession of a magic pebble that allows them to insurer a 35 year old male more cheaply than a universal life company (not to suggest that it’s unheard of to find one company issuing both contracts, just somewhat unusual).

So if the expense is the same, how can one provide more income than the other? And why does there tend to be such a consistent trend in the difference. Universal life insurance tends to come out on top, and not by a little bit. Seems as though this life insurance is life insurance business is poppycock and it’s the universal life carriers who possess the magic pebble. I assure you, this is not the case.

Instead the answer is rather direct, and yet quite a bit subtle. And that answer is simply that, according to the U.S. government, there is more than one type of life insurance.

When Life Insurance isn’t Life Insurance isn’t Life Insurance

We’ve addressed before that something changed in the life insurance word in 1984. Congress, facing a tricky tax situation and realizing people could practically place a limitless amount of money into universal life insurance and shelter its gain from taxes imposed new rules that curtailed that “limitless” part. This started the process of testing life insurance contracts to ensure that they complied with Federal Law to qualify as life insurance.

There were two tests created from this change in legislation, and if you skipped the link above, here’s a second change to find more information on that.

Cash Value Accumulation and Guideline Premium Test, a Real Quick Overview

Really quickly the two tests are the Cash Value Accumulation Test and the Guideline Premium Test. The detailed differences between them is largely unimportant for today’s discussion, but the big take away for now is simply this: the Guideline Premium Test allows for a smaller “gap” between cash surrender value and death benefit, and since this gap (also known as the net amount at risk) is the only insurance cost to the insurer, universal life insurance is theoretically less expensive when designed and implemented to optimize cash values. This means most (but I assure you not all) carriers will recognize this lower expense with a policy that has lower expenses to you the insured/policy holder.

Cash Value Life Insurance LiquidityAnd it gets more pronounced over time.

The guideline premium test allows more money into the contract in early years, and the “gap” mentioned above is allowed to get much smaller as the insured ages. In essence, when cash values are our main goal, most of the time we’re looking to make death benefit as minimized as possible. Universal life insurance allows us to do this more efficiently, and for this reason, we often times find that universal life insurance is capable of producing more money out as income per premium dollar when the policy is being funded.

Does this Mean we should Forsake Whole Life Insurance?

No. Just because something works most of the time doesn’t mean it will work all of the time. And there are plenty of situations where cash values are important, but death benefit is also very much desired; in these circumstances whole life insurance has a serious fighting chance.

They Really are Different

So the answer to our initial question has to do with the fact that universal life insurance can (but I’d be a tad remiss if I didn’t mention doesn’t always have to) qualify for as life insurance in a way that makes it slightly functionally different from whole life insurance. And it’s for that reason that it has a “learner” design for optimizing low death benefit and more cash.

3 Responses to “Why do we See more Income from Universal Life Insurance than Whole Life Insurance?”

  1. Barry D. Flagg, CFP, CLU, ChFC says:


    Steve Savant referred me to your newsletter and I have enjoyed reading it. However, your statement that “to suggest that there is some wild difference behind the expenses one is likely to incur when it comes to universal life insurance vs. whole life insurance is entirely fiction” is INcorrect. Internal expenses between different product types and even within the same product types vary by as much as 80% according to all of research in my company’s database, a Tillinghast Towers Perrin study, and a report from a 3rd-party administrator of trust-owned life insurance for large financial institutions. While I agree with the other reasons you cite for the performance differences between UL vs WL, the expenses charged inside these policies are simply NOT the same even for the same insured and even from the same insurer. I’m happy to share research from my company’s database that shows this wide variance in policy pricing and would be welcome co-authoring an article on this topic if you’d also be interested?


    comment edited to remove promotional content

    • Brandon Roberts says:


      You missed the point. I’m merely pointing out that the cost of insuring someone is no different based on the product (i.e. your probability of dying is not affected by your decision to purchase whole life insurance vs. universal life insurance). That certainly doesn’t stop any one company from charging differently, as I am explicitly under no delusions that this practice very much exists.

  2. Chris says:

    Hey Love the talk here,

    Just doing my own little voyage to explain the difference in the income also and came across this post. I agree with you Brandon and Just wanted to chime in for no reason really. It seems as though what brandon was saying was , just because the two polices “are” different in cost does not expose some underlying inherent risk to mortality on the same insured. If a death benefit is a death benefit is death benefit, all we need to know is what is the likely hood of that benefit being paid within this policy times horizon which if all variables are equal, DB, premium, rating, and blend ect ect, then the mortality cost would be no different. NOT that they “AREN”T” different. The answer: Because it is , is quite the tautology. I may be way off and some actuary may rip me a new one…but thanks brandon , pointed me in the right direction

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