Whether you are the primary earner in your household or a stay-at-home parent, your contributions to your family keep things running smoothly each and every day – financially and otherwise. If you were to pass away, how would the financial situation of your family change? Looking at the contributions of a primary earner, the loss of income could be noticeable, and looking at all the contributions of a stay-at-home parent, hiring and maintaining consistent childcare and cleaners could add significant expense to a family’s budget.
That’s where life insurance comes in. Life insurance is a way to provide some financial protection for your loved ones if you should pass away. While there are different types of life insurance, they have a common thread. You choose your policy and pay a monthly premium in exchange for a death benefit (the coverage amount you chose in your policy) to be paid out to your beneficiaries (the family members or loved ones you selected) if you were to pass away while holding an active policy.
Depending on the type of insurance, the benefit could be tax-free. It could be used however the recipient sees fit – it could go towards debts, the mortgage, higher education, or anything else.
You may have heard of the primary types of life insurance – term vs whole vs universal. What do they have in common? How do they differ? Which might be the best fit for you and your budget? Today, we’re going to explore universal life insurance vs term life insurance. (If you’re curious about whole life insurance vs term life insurance, we’ve got you covered.)
Let’s take a deeper exploration of universal life insurance vs term life insurance:
What Is Term Life?
Term life insurance covers the life of the policyholder for the length of the term selected for the policy. If the insured were to pass away during the term, beneficiaries would receive a death benefit, which is the coverage amount selected by the insured. Premiums must be paid in full each month, but this type of policy does not accumulate a cash value.
Term life insurance can be one of the most simple forms of life insurance to set up. It involves providing some of your health, medical, and lifestyle history and/or a medical exam, choosing your coverage, and selecting the length of the term. Monthly premiums need to be paid to keep this policy active.
Getting term life insurance used to involve these steps:
- Decide on your life insurance carrier.
- Request a life insurance quote.
- Fill out an application.
- Prepare for your phone interview.
- Schedule a life insurance medical exam.
- Wait for approval.
Now, some companies (ahem, like Bestow) have removed a few steps from the process, so it could look like this:
- Click here and answer a few questions in seconds.
- Receive your free quote instantly.
- Apply online in as little as five minutes.
- Receive an instant decision.
- If approved, pay your premium and get same-day coverage!
Term Life Insurance Coverage:
Each company has different factors for extending term life insurance coverage. Age and health can factor into whether a person is able to receive coverage, and those factors can also factor into the cost of the monthly premium. A healthy person in their 30s will likely have a cheaper premium than a healthy person in their 50s for the same amount of coverage. Terms are often between five and 30 years, and coverage amounts can vary from thousands to millions of dollars, depending on the insurer and your budget for premiums.
Term Life Insurance Benefits:
Term life insurance benefits are straightforward. If you pass away prematurely while holding an active policy, your beneficiaries would file a claim to receive the death benefit – the coverage amount you selected when choosing your policy. The death benefit for term life insurance is generally tax-free and can be used however the beneficiary chooses. It could help with funeral expenses, debt, mortgage payments, tuition, income replacement, or anything else.
Pros of Term Life Insurance:
- Easy to understand: Term life insurance policies are one of the simplest types of life insurance because they are so straightforward. Benefits are only paid upon the death of the insured, as long as it fell within the term of the policy and if premiums were paid.
- Affordable: Term life insurance is one of the more affordable types of life insurance. The monthly premium is locked in with the policy and does not fluctuate from month to month. (For example, Bestow offers rates as low as $11/month!)
- Wide coverage: Term life insurance can offer $1 million or more in coverage, depending on the carrier.
- Tax-free benefit: As mentioned above, term life insurance payouts are generally tax-free to the beneficiary, so they are able to use the entire lump sum.
- No penalties: If you decide at any point that you no longer want term life insurance coverage, you can simply cancel with no fees or penalties.
Cons of Term Life Insurance:
- Temporary coverage: Terms are generally anywhere between five and 30 years, and some families may need more permanent forms of coverage, depending on their needs.
- No cash value: If you outlive your policy, there is no cash value. The policy simply expires at the end of the term.
- Requalification: If your policy expires and you’d like to get more coverage, you’ll need to reapply. As you get older, the price of premiums go up. Some term policies offer rider options that allow you to renew your policy without going through underwriting again — however, your premiums are likely to increase based on your current age and other factors.
Now let’s look at universal life insurance vs term.
What Is Universal Life?
Universal life insurance is one of the main types of permanent life insurance. This type of life insurance policy can provide lifetime protection and also offers the opportunity to build a cash value. This type of policy offers the insured more flexibility in terms of premiums and death benefit, while also providing a cash value component.
How Universal Life Insurance Works:
When you pay premiums for a universal life insurance policy, a portion of the money goes toward the cost of insurance, while the rest is invested. The investment portion may accumulate cash value over time, which grows tax-deferred. A policyholder can access that cash value like a loan, though it’s important to keep the policy adequately funded or else coverage could be lost. The dual features of protection and potential cash access make universal life insurance a versatile option that works well for some people.
Universal Life Insurance Coverage:
Coverage lasts for the life of the insured as long as premiums are paid. Universal life insurance also allows flexible premium payments–which can provide some financial benefit–but if the universal life insurance account acquires a negative cash balance at any point, coverage will lapse.
Universal Life Insurance Benefits:
Unlike term life insurance, universal life insurance has no set death benefit amount. The policyholder can adjust the death benefit as needed, over time. Another benefit of universal life insurance is a cash value savings account. A portion of each premium goes into a savings account that can accumulate interest. Money market interest rates will generally set the rate of return on this account. Some universal life insurance policies will offer additional options for investing this money.
Pros of Universal Life Insurance:
- Financial flexibility: Universal life insurance allows you to tailor a policy to fit the specific financial needs of the insured.
- Flexible premiums: Universal life insurance policies allow you to change how often and how much you pay. If your budget is tight for a month, you can decrease your premium amount.
- Flexible death benefit: With universal life insurance, you have the option to increase the death benefit if you desire. If, after a few years, you want to decrease your death benefit, you can typically do so.
- Potential for cash value growth: Your policy’s savings account can accumulate cash value at the rate set by your insurer, increasing the potential for cash growth.
- Loans and withdrawals: If your policy has accumulated a cash value, you may be able to borrow or withdraw from the account (in certain circumstances), giving you access to cash flow from the policy before death.
Cons of Universal Life Insurance:
- Complicated details: Because universal life insurance policies are highly tailored to the insured person’s finances, a professional is generally needed to make the best decisions. These policies are more intricate than a term life insurance policy because they offer more options over a potentially much longer period.
- Monitoring needed: If you acquire a negative cash balance, your coverage will lapse, so you would need to monitor your account to ensure the cash value is positive.
- Risk exposure: Market fluctuations can affect your value. If interest rates rise, you’ll experience growth, but a drop in interest rates could affect the cash value of your policy.
- Rising costs: Even with a steady premium, the cost to insure you rises as you age. Part of your premium is used to pay your insurance expense in the early years of your policy, but in later years, your premium may not be enough to cover the increasing cost to insure you, and overages may be pulled from the cash value of your policy.
Which Is Better for You?
Whew, that was a lot to take in! Comparing universal life insurance vs term life insurance, how do you decide which one might be the best fit for you?
- Temporary coverage and fixed, lower monthly premiums: If you’re looking for some financial protection to cover the length of a mortgage (30 years) or the financial needs of a child until adulthood (20 years) if you were to pass away, then term life insurance may be the fit for you. While there is no cash value and terms are temporary, monthly premiums are lower than universal life insurance.
- Permanent coverage with more flexible options: If you want permanent coverage to help support lifelong dependents or an additional way to provide life insurance with cash value, then this might be the right fit for you. Premiums can be flexible and the policy could accumulate cash value for use before your death. However, these additional benefits make premiums more costly than term life insurance.
Universal life insurance vs term life insurance…which one wins out? This will be determined by several factors: your financial needs, your ability to budget for premiums, and your desired outcome.
If you’re not sure where to get started, you could get a free quote and start comparing your options. Bestow offers a quick and easy term life insurance quote with a simple online application process if you decide that is the right path for you and an eFinanical agent can help you out with more information on universal life insurance.
Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation. Furthermore, this article does not ensure your eligibility for any specific product.