When it comes to types of life insurance and deciding which policy is affordable and best, consumers usually compare term vs. whole life insurance. For certain families, adults, and parents with specific needs and financial goals, universal life insurance may offer the best coverage at the cheapest rates, and could offer an affordable, competitive alternative to term coverage. For this reason, it is essential that consumers compare term vs. universal life insurance policies.
Term life provides pure, temporary coverage at cheap rates, without a savings account or investment component called a cash value; while an universal life policy provides permanent insurance at slightly higher rates but offers the ability to accrue and build a cash value through investments.
Both types have advantages and disadvantages, and the difference in costs could be minimal over a life time, requiring a comparison to determine the pros and cons for your specific situation.
Term Life Insurance
The biggest advantage of term coverage is it has the cheapest rates of any policy. However, it must be replaced or renewed at the end of the term period at higher rates. Life insurance companies determine rates by age and health, and the younger a policyholder or applicant is when he/she purchases the coverage, the cheaper the premiums.
While term rates on a 30 year policy for a 25 year old man may be really cheap, when he needs a new contract at the age of 55, his premiums will not be as low cost as before. For young families with limited budgets, term life insurance may be extremely affordable initially, but the cost may be higher with age and the development of health issues or problems.
Universal Life Insurance
On the other hand, because universal life insurance is permanent, rates are statistically based on the average life span of the insured person. Rates on universal policies for a 25 year old man will, initially, be higher than those on a term life policy, but premiums will remain fixed over the insured person’s lifetime.
There is no need to replace or renew universal coverage so the man will pay the same premiums at age 55, 65, and 75 as he did at age 25. Most universal policies remain in effect until age 95 or age 121 as long as the premiums are paid and the policy remains in good standing.
Pros and Cons – Term vs. Universal
Term life insurance is pure insurance and term life’s primary advantages are low fixed rates and a fixed death benefit, which is the face value of the policy and the amount your beneficiaries will be paid out when they file a claim if the policyholder dies prematurely while the contract is still in force.
Universal life offers the same coverage with the added benefits of an investment feature, which accrues cash value over time and can be used in financial planning or as collateral for low interest loans. While the universal policy premiums are not as cheap as term, this is due for two reasons – the risk to the insurance company and the use of the premiums.
When policyholders make premium payments on a universal life policy, a majority of the premiums are used to fund the cash value, providing you with money to invest in stocks, bonds, mutual funds, and commodities. Universal life insurance as an investment can offer very good returns and help you grow your nest egg for retirement, though investment returns are not guaranteed and your cash value can suffer losses if you are not careful.
The bottom line is that the death benefit is tied to the performance of the investments and may fluctuate, while term life protection has a fixed death benefit. If the cash value in a universal policy reaches zero due to negative investment returns or losses, the policy may lapse and the insured person will have to seek a new contract and reapply.
The other reason term life prices are so cheap is that, if the policyholder does not die within the term period of the policy, the company keeps all the premiums paid. With universal, because the policy is permanent and provides coverage for a lifetime, the carrier will eventually have to make a pay out of the death benefit, therefore decreasing their profitability.
Again, term protection does not have a cash value and if the insured person outlives the policy, the insurer does not pay a death benefit and retains the premiums, while universal insurance is permanent and payment of the death benefit is guaranteed.
Final Word: Term vs. Universal
Overall, term vs. universal life insurance comes down to what your specific financial and insurance needs are, your risk tolerance, and the type of coverage you feel comfortable buying.
Both term and universal have their pros and cons, each targeting a niche demographic with unique needs and future financial goals. Universal rates are lower than those of permanent whole life insurance but higher, initially, than those of term premiums.
Because term life is temporary and new or renewal policies may not have the same cheap rates in the future, the cost of universal life coverage may actually be lower over a person’s lifetime than the cost of term coverage.
There is also the option of purchasing universal life protection when you are young and healthy, and buying a supplementary term policy later on in life when you are in need of additional coverage.