Term vs. Universal Life Insurance: An Overview
Although life insurance comes in various forms, two common types are term life and universal life insurance. The main differences between these are the duration of the term, cash value accumulation, and cost.
- Term life insurance provides coverage for a specific period of time, for a fixed premium, and with no cash value accumulation.
- Universal life is a form of permanent life insurance with a cash value account, whereby premiums received above the cost of insurance are invested.
- The premiums for term life are relatively low compared to universal life.
Term Life Insurance
Term life insurance is the most basic insurance policy. It is a life insurance policy that provides coverage for a specific period of time and usually for a fixed premium. Some policies provide coverage for dismemberment and additional coverage for accidental death. If you or your beneficiaries do not make any claims during the term the policy, it will expire. At expiration, some insurers allow for the continuation of the policy at a higher rate or the conversion of the term policy into a permanent policy. 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
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 often be cashed in at some future point. Because these policies are permanent, early termination of the contract by the policyholder typically results in 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 purchases term insurance, his or her premium might be $20 per month. With a universal policy, the same 20-year-old might pay a premium of $100 per month, with $20 going toward death insurance and the remaining $80 going toward savings. When the person reaches age 45, term insurance might cost $50 per month, while universal life would still cost $100 per month, although a lower portion of that amount would go into savings.
According to most unbiased experts, term life is more appropriate for the average individual looking to insure himself or herself against unforeseen events. However, this does not mean 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. Also, individuals who start families later in life and need insurance to protect their loved ones may decide cash-value insurance is more suitable than term life.