Universal life insurance vs term life insurance is centered on a savings and reinvestment component present in universal policies, but not in term policies. Universal life insurance charges a larger fee, but not all of it goes towards direct cost of insurance. Some of the monthly fee goes towards a savings account that can accumulate money and can be cashed out. By contrast, term life insurance is simpler: there is a fee and it is only directed towards paying a premium in exchange for payout to beneficiaries upon death or severe injury to the insured.
Universal vs Term Life Differences
Universal life insurance is a very long-term purchase. This has an understandable appeal since the decision to purchase universal life insurance has to be made only once. Also, the savings part of monthly payments, when added over time, results in an additional payout that has understandable appeal to beneficiaries. As will be explained further, these savings can be used to offset the cost of insurance premiums, giving impressive flexibility to policyholders.
By contrast, term life insurance has to be renewed, and with renewal, the policy will require a higher premium since statistical risk of death or serious injury rises in long time scales. As such, the savings gained from low rates early on in a term life insurance policy may be wiped out with much higher premiums for people who want to renew term life insurance later on. Also, the greater cash retained due to lower monthly premiums early on may not be invested as good as what universal life insurance could have delivered. As such, the policyholder may be further in the hole.
When Term Life is a Good Idea
For simplicity, term life can't be beat. The policy specifies the time it is in effect and how much will be charged and paid out in the event of a claim. There are many benefits of term life insurance, however there are no savings or other components to the monthly payments, meaning that the insured individual is free to save/invest more of his money elsewhere. This is important since smart investing may outrun whole life savings benefits, resulting in more financial cushion for the insured and his loved ones without having to pay out more to the insurance company.
Details of Term Life Policies
- Lasts for a set period of time
- Amount of death benefit specified at beginning of coverage
- Simple to understand, usually the cheapest life insurance policy
When Universal Life is a Good Idea
Total universal life insurance payments do not go up and the policy spans the rest of the insured's life assuming that he does not stop making payments. This is an important point to consider. When signing up for universal life coverage, the insured individual's payment will be distributed towards insurance premium vs. savings depending on various factors such as age and health. However, the total monthly payment will not change, just that less of it will be devoted to a savings account. This cash value payout is available separate from the death benefit policy to beneficiaries. Meaning that the tax-deferred amount deposited into the cash-value account is available for withdrawal before the insured person's death, but remains as earnings of the insurer if it is not withdrawn before a death benefit claim is made.
To add a caveat to the 'fixed payment' claim: since not all of a monthly payment goes towards direct cost and risk offset of insurance, a universal life insurance policy offers the choice to pay less during some months and use the cash value accumulated as essentially credit for what is owed. There are limits to how much an insured individual may do this, of course, but this option still gives some flexibility. For instance, if the insured wants to cover one month's payment with accumulated savings and use cash on hand for something else without compromising the entire policy, that can be done with universal life insurance. Term life does not give this kind of flexibility and requires payment on time and in full every month.
Comparing Term and Universal Life
|Universal life||Term life|
|Length||Remainder of your life||Normally 10-30 years|
|Premiums||More expensive||Less expensive|
|Other benefits||Savings component||Can usually convert to permanent policies|
Both insurance types have their place in a well-rounded financial protection package. As mentioned above, details will determine if universal life insurance or term life insurance is worth it in your situation. The key difference between universal and term life insurance is the savings component. Though universal life insurance savings are an extra cost to begin with, the extra cost could convert to flexibility later on that term life insurance typically won't match. To make sure you take everything into consideration and cover all your bases, it is a good idea to talk to a life insurance agent or broker, like the ones we can connect you to right here on our site.