Term Life or Universal Life - Decisions, Decisions . . .
Can I save you some time unless you just enjoy reading my prose?
Term Life is life insurance for a specific term or period of time, e.g. 15 year term, 20 year term, 30 year term. Once the term expires before the policyholder does, neither the contract nor the obligation exists.
Universal Life is life insurance that provides coverage until death (sometimes referred to as permanent - ah ha!) It also offers a cash value option in addition to the death benefit that provides an accumulation of monies as you pay your premiums.
Many people are torn between the benefits offered by term life insurance and those offered by universal life insurance. They appreciate the affordability of term life. They also like its flexibility. Term life policies can be cancelled with no significant penalties, and new ones started and for different death benefits and different premium amounts.
On the other hand, universal life offers something term life does not: coverage until death. The policy will not expire after a certain number of years, as it will with term life, so the consumer never has to reapply for coverage. As a result, coverage cannot be denied later in life due to age or poor health.
The solution for many people is universal life insurance. Universal life insurance is a type of whole life insurance or permanent insurance. It offers greater flexibility and a lower cost than traditional whole life insurance but more expensive than term life; it shares whole life’s chief characteristics: permanent coverage, premiums that do not change based on age or health, and the accumulation of cash value.
The chief distinction between term life insurance and universal life insurance is the duration of coverage. With a standard term life policy, the coverage is limited to a specific time frame—the term. At some point, either the policyholder expires or the coverage does. If the policyholder dies during the term, the death benefit is paid to the beneficiary. If the policyholder outlives the term, the coverage will cease on the policy end date. Some term life is renewable without a physical examination, but premiums increase based on the age of the insured at the time of renewal. With universal life, the coverage continues indefinitely, until the policyholder dies.
A person can use a succession of term life insurance policies to gain coverage into his or her eighties or nineties. Each time a person renews a term life policy or applies for a new one, however, the cost of insurance goes up, due to the increased death rates among older people. If a person develops any sort of health problems during the term, the term life insurance premiums stay the same. If the person does not have “renewable” term life insurance, then when the term expires and the person applies for new term life coverage, the premiums increase dramatically. If the person has developed or experienced a serious health problem, such as cancer or a heart attack, he or she may not be insurable at all.
The cost of universal life or permanent life insurance does not increase with the passage of time or changes in health. Coverage cannot be terminated, no matter what health problems the insured encounters. The guarantee of insurability accounts for the higher cost of permanent life insurance.
Another main difference between term life and universal life is that universal life offers savings features, while term life does not. Term life, is “pure” insurance. It insures against death, and that is all. Universal life also insures against death, but it also provides a mechanism for the accumulation of cash value, or savings.
Early in the life of a universal life insurance policy, the cost of insuring against premature death is much less than the premium amount. The insurance company deposits the excess amount—less the company’s profits and fees—into a tax-deferred savings account. This amount is known as “cash value.” These funds are invested by the insurance company. Proceeds from the investments are credited to the account, increasing the cash value. These funds are available to the policyholder in the form of a loan or as a withdrawal. If the policyholder cancels the policy, he or she receives the cash value as the policy “surrender amount.”
With universal life, the policyholder has the option to increase or decrease the premium amount (within limits) and increase or decrease the death benefit. For example, the policyholder can decrease the premiums, should the beginning price become unaffordable. If the policy holder wishes to build up more cash value or increase the death benefit, he or she can pay a higher premium.
