Universal vs Term Life Insurance

Life insurance can help provide a safety net for your loved ones after you pass. This can range from helping cover end-of-life expenses to helping compensate for the loss in income upon your passing.

So, how does it work? Life insurance is a legally binding contract between an insurance company and a policyholder. In this contract, the insurer guarantees to pay an amount of money to the policyholder’s beneficiaries when the policyholder passes, subject to the policy terms and conditions. In exchange, the policyholder pays monthly premiums to the insurer to keep the policy in force.

Term life insurance is a common form of life insurance product. This insurance usually offers coverage for a specific period of time, which typically ranges between ten and thirty years. After the set number of years on a policy ends, the policy expires.

Some term life insurance companies will allow you to renew your term policy after its expiration date. This can come with a higher premium rate, or you may be able to convert the expired term policy into a permanent life insurance policy.

Just like most other forms of life insurance, you maintain term life insurance coverage as long as you pay your premiums until your policy’s expiration date. If you pass away while your term life insurance policy is active, your beneficiaries will receive the death benefit.

Some term life insurance policies offer riders‒which are essentially add-ons you can include with your existing life insurance policy to customize it to your needs‒that can include coverage for dismemberment, serious disabilities, and even additional coverage for accidental death.

Universal life insurance is a type of permanent life insurance. This means that as long as the policyholder continues to pay their premiums in-full and on time, their coverage will remain active. These life insurance policies generally do not have an expiration date.

Like other life insurance policies, when the policyholder passes away, their beneficiaries receive the death benefit subject to the policy terms and conditions. However, universal life policies can have a savings component called a cash value account, which can provide an additional benefit for the policyholder’s beneficiaries.

When the policyholder pays their premiums, a portion of that payment goes into the policy’s cash value account. This account accumulates value on a tax-deferred basis and is accessible to the policyholder during their lifetime.

For example, after the policyholder has built up enough funds in the cash value account, they may be able to utilize these funds to pay for portions of their monthly premium and lower their out-of-pocket costs each month. In some instances, policyholders can use the cash value through a life insurance policy loan, and those funds can be used to help curb the costs of other expenses.

Both universal and term life insurance policies can come with positives and negatives; choosing the right type of product for you depends on your needs and goals. Here are a few key ways universal and term life insurance products can differ:

Insurance Coverage Duration

A defining factor of term life insurance is that it’s not typically designed to last more than a set number of years such as thirty. So, if you’re a young adult in good health and are seeking an insurance policy that will offer lifelong coverage, term life insurance may not be the best fit for you.

However, there are situations in which term life insurance makes sense for younger policyholders in good health. For example, active duty members of the armed forces may take out a term life insurance policy due to the unpredictable nature of their jobs. This coverage can help provide peace of mind for the policyholder and their beneficiaries.

Insurance Premiums

Universal life insurance can offer policyholders more flexibility when it comes to their premium payments, whereas term life insurance policyholders have stable premiums.

For some, consistent premiums can be helpful for financial planning. Universal life insurance premiums may increase over the policyholder’s lifetime, but policyholder’s can typically pull from their cash value account to offset the increase in premiums or even lower the monthly premiums!

With both types of policies, policyholders must always pay their premiums in-full and on time. Failing to pay the premium can result in a lapse in coverage.

Investment and Cash Value Components

With a term life insurance policy, policyholders typically only have a death benefit. Universal life insurance policies, on the other hand, include a cash value component. This cash value component can potentially increase the total value of the payout beneficiaries receive, as a large portion of it can be paid out alongside the death benefit.

Life Medical History and Health Exams

Universal life insurance policies typically require policyholders to submit their medical history, undergo a medical exam, or fill out a health-related questionnaire during the application process. This can mean that there is a chance you could be denied coverage depending on your health status or lifestyle habits. At the very least, it could mean an increase in your monthly premiums.

With term life insurance, you may not need to jump through those hoops to get approved for coverage. This can be helpful for individuals who have high-risk lifestyles, such as smokers or individuals with severe chronic illnesses. If you were recently diagnosed with a terminal illness and are seeking insurance to help your beneficiaries have a safety net after your passing, term life insurance may be a good fit for you.