Which Is Better Term Or Universal Life Insurance
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Term life insurance coverage ends after a specified period of time, while universal life covers you as long as you pay your premiums. Compare these two life insurance options, thinking about your family’s financial needs as well as your budget and how long you want coverage.
Both policies offer a death benefit once you die, but the main differences come down to how long the coverage lasts, and its ability to build cash value.
What Is Term Life Insurance?
Term life insurance is the simplest and cheapest most affordable type of life insurance. You pay a fixed premium for a set number of years. If you die during the policy, your beneficiary will receive a death benefit.
What should I know about term life insurance?
- It provides coverage for a set time.
Get coverage for 10, 15, 20 or 30 years — and once the term expires you can either renew your policy, convert to a permanent policy or let it lapse completely.
- It’s more affordable than universal life.
The insurer has a lower risk of paying out the death benefit before the term ends. Permanent policies, on the other hand, provide lifelong protection, so the insurer knows it’ll have to pay eventually
- You have the option to renew your coverage when your term ends.
Once your term ends, you can either renew your policy or convert to a permanent policy if you’re younger than 70.
What Is Universal Life Insurance?
Universal life is a permanent policy, offering lifelong coverage as long as you keep paying your premiums. The major difference between universal life and other permanent policies is that the payments are flexible.
Like term life, universal life offers a tax-free death benefit. However, it’s more of an investment. A portion of each premium is invested to give your policy a cash value. Once you build up sufficient savings, you can tap into your policy during your lifetime.
What should I know about universal life?
- You can borrow against your policy.
- After 10 to 15 years, you can borrow from your cash value to pay for things like a downpayment on a house.
- You can adjust your premiums.
- As your life changes, you can change your premiums. And once you’ve accumulated cash value, you can use it to pay your premium. However, this adjusts the amount of death benefits your beneficiaries will receive.
- The premiums increase as you age.
- Unlike term life insurance, universal life premiums can rise over time.
- You can earn interest on the cash value.
- The interest rate is set by the insurer and can change according to the market. It’s also hinged on your insurer’s investment performance, but it can’t dip below the policy’s guaranteed rate.
How Much Does Term Vs Universal Life Insurance Cost?
Since term life insurance is temporary and has no monetary value while the policyholder is alive, it’s the much cheaper option of the two. Universal life insurance is more expensive because it offers lifelong protection and has a built-in cash value component, making it an investment product.
Conclusion
When you’re deciding between term vs universal life insurance, think of your financial obligations and goals. If you have short-term needs or a tight budget, a term life policy can offer protection and security for a specified period of time. If you’re interested in treating life insurance as more of an investment, you might want to look into a cash value policy like universal life.
Also Read: Some Considerations Before Purchasing A Money-Back Guarantee
