Term vs. Universal Life Insurance: What type of policy should you buy?

When you are considering different types of life insurance, you are going to have to do some comparing. Today you will learn a little bit about term vs. universal life insurance. You will find that these two types of insurance are very different and, like most insurance options, there are benefits and downsides to both options.

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Some insurance agents believe that you should never buy term life insurance because it isn’t a guaranteed policy and there is no cash value. Other industry experts believe that term is the best way to purchase a policy because of its affordability, and that you should not use insurance as an investment.

Universal life insurance gets mixed reviews as well because of the fees associated with maintaining this type of policy. In addition, there is no guarantee for the final benefit that a term policy offers.

Keep reading to learn more about the differences between term and universal life insurance and how they compare to one another.

What is term life insurance?

Term life insurance is insurance that offers a guaranteed death benefit if the policy is in effect when the person who owns it dies. However, a term policy is only in effect for a specified period of time, which means that if the policy owner doesn’t die when the policy is in force, then no benefit will be paid.

Typically, term life insurance policies are available for terms of between 10 and 30 years, although there are a couple of life insurance companies that offer term policies for up to 50 years. The longer the term is that you choose, the more expensive the policy will be. Conversely, the shorter the term the less expensive the policy will be.

Term life insurance policies have no cash value. That means every dollar you put into the policy belongs to the insurance company. If you don’t die before the term is up then the insurance company doesn’t have to pay out any benefit and they keep all of the premiums that you have paid.

When you purchase a term life insurance policy, the insurance company is betting on your surviving for the length of the term of the contract. The higher risk you pose for dying, the more expensive your term life insurance will be. Investing in a term life insurance policy typically means that you can purchase a larger benefit amount for less than half of the cost of a universal life insurance policy of the same benefit value.

Usually men and women with families, especially those with children, will choose a term policy so that they can provide their loved ones with a great deal more money if the unexpected happens. A healthy man of 35 could get a $250K policy, with a physical, for a little as $25 a month, although there are numerous factors that determine the cost of term life insurance.

What is universal life insurance?

Universal life insurance is a permanent life insurance policy that allows you to draw cash based on the excess value of the policy. What this means is that once you meet a certain premium obligation for your policy, your policy then has what is called cash value.

In addition, a universal life insurance policy is divided into two types of investments. You have a guaranteed benefit amount that your minimum monthly premiums pay for and then the cash value amount, which is the target or maximum premium that you pay.

The insurance company invests your cash into investments that they choose. Although you are usually guaranteed a certain percentage rate, the investments the insurance company chooses will directly affect the amount that you earn.

When you purchase a universal life policy, you are given three premium options:

• You can choose to pay the minimum premium, which ensures that your policy doesn’t lapse, but it never gains any cash value.
• The second option is the target premium. The target premium is the amount that allows your policy to gain cash value over time.
• Lastly is the maximum premium. The maximum premium is the maximum amount the insurance company will allow you to invest. This could be an annual maximum or a monthly maximum depending on the type of agreement that you have made.

A universal life insurance policy allows for flexibility of payments. If you miss a premium payment, as long as you have a cash value on your policy, then the basic premiums will be paid from that cash value. If the cash value is depleted and you don’t pay your premiums, then the policy will lapse.

When you accumulate cash value, if you need money for any reason, you can draw on that money. You have two options, you can withdraw the cash as if it were a bank account and pay the associated fees or you can borrow money from the policy and repay it with interest.

Which policy is the best option?

As these policies are so different, it is difficult to say which one is the best. You have to consider how much you can afford in premiums as well as whether you want to make your insurance policy an investment as well. The level of risk and security will also impact your decision.

In either case, before you purchase any type of life insurance, you should get life insurance quotes online by entering in your zip code right now!