What is the difference between term and universal life insurance?
Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection for accidental death and possibly debilitating injuries for a specified period of time. If you or your beneficiaries do not make any claims during the term of such a policy, the policy will typically expire worthless. Generally, term life insurance is cheaper to buy during the earlier years of life, when the risk of death is relatively low. Prices rise in accordance with increasing risks and advancing age.
Universal life insurance falls under a broader category of policies sometimes referred to as cash-value, or permanent, insurance. These types of insurance policies combine death benefits with a savings component or cash value that is reinvested and tax deferred. The savings portion is accumulated throughout the life of the policy and can sometimes be cashed in at some future point. Because these policies are permanent, any early termination of the contract by the policy holder is subject to penalties. During the earlier stages of your life, a large portion of the premium paid to this policy is routed to the savings component. During the later stages of life, when the cost of insurance is higher, less of the premium is devoted to the cash portion and more to the purchase of insurance.
For example, if a 20-year-old adult purchases term insurance, his or her premiums might be $20 per month. With a universal policy, the same 20 year old might pay $100 a month, with $20 of that going toward death insurance and the remaining $80 going to the savings component. When the person reaches age 45, term insurance might cost $50 per month; however, with universal insurance, the person would still pay $100 a month, although a lower portion of this would go into the savings component.
According to most unbiased experts, term life is more appropriate for the average individual looking to insure him or herself against unforeseen events. However, this does not mean that term life is better for everyone. For example, individuals looking for the tax advantages associated with cash-value plans are not concerned with the prohibitive costs related to those plans, and individuals who start families later in life and need insurance to protect their loved ones may also decide that cash-value insurance is more suitable than term life.
To learn more, read Buying Life Insurance: Term Versus Permanent.
Term insurance provides life insurance coverage for a particular period of time for a specified premium. For example, a $100,000 20-year term policy for an annual premium of $1,000 is a contract that allows you to protect your beneficiaries for the next 20 years. At the end of 20 years, the coverage either ends, or you can continue the coverage at a much higher premium.
Universal life insurance is a form of "permanent" lifetime insurance. You'll pay a higher premium for that $100,000, but you'll have so much more flexibility. The insurance company will create a "cash value" account in this policy, and offer a guaranteed minimum interest rate on the growth. Part of your premium is used to pay for the annual cost of insurance, and the other part goes into a growing cash account that you can access at any time. Other benefits include:
1) Adjustable coverage, so you can increase or decrease the death benefit as your needs change.
2) Flexible payment options, so you'll be able to increase, decrease, or even stop your premium payments as your circumstances change.
3) Growing cash value, so you'll have a "bank account" inside your policy that you can access for emergencies, college expenses, supplemental retirement income, or any other cash needs you may have.
Hope this helps. Good luck!
Term life insurance is temporary insurance which will usually terminate after a specified period of time. This type of insurance has a low premium compared with other types of life insurance. Universal life insurance is flexible coverage which will be temporary or permanent depending on how the policy is funded by the policy owner. Universal life insurance has a cash value which can be withdrawn by the policy owner, and can be invested in either a fixed interest or variable sub=account. In a variable sub-account the cash value is invested in assets such as stocks and bonds. How long the policy lasts will depend upon a number of factors including the premium payments made to the policy as well as the performance of the sub-account.
The main difference between Term and Universal Life insurance is that a Term policy covers you for a specific number of years while a Universal Life policy is designed to provide a permanent death benefit.
There are many things to keep in mind when comparing these types of coverage though. One notable difference is price- since the risk is much lower for an insurance company when you purchase a term (most people live through the term and never file a claim) the cost of a term policy can be dramatically lower than it's permanent life insurance cousins like the Universal Life policy. This makes a term policy attractive to cover the cost of a mortgage when you need it, that you don't have to continue once that debt is paid off. You just don't renew the term at the end of the coverage period and you're done.
Term insurance is what most people call "pure insurance". It only pays if you die. Universal insurance has a cash value that builds up as you pay premiums. Premiums are higher than term insurance because of the savings component. It's sort of a hybrid savings account insurance product. I prefer term if you only need coverage against loss of income. Universal can be used as a planning tool, but at a cost. Consult a good, independent agent that doesn't have an interest in selling you a product to have an analysis done as to which is best for you.