What is the Difference Between Universal Life Insurance and Term Life Insurance?
Deciding the type of life insurance that is right for you can be a stressful process if you are not well-versed in the insurance industry. You are planning for when you can’t be present, so knowing if the choices you are making now will be the right ones later is important.
When deciding between term life insurance and universal life insurance, how can you be sure which one is right for you and your family? The core difference between these two types of insurance is that term life carriers tend to have lower payments but the coverage has a set end date, as opposed to universal life insurance premiums, which can be more expensive, but will last for the policyholder’s life.
What Makes Term Life Insurance Unique?
Term life insurance is, as it is named, insurance that is limited to the term or duration of the original contract.
Premiums are the amount that you pay your insurance company to keep your policy active, and premiums for term life insurance are often lower than that of other forms of life insurance, such as universal coverage. These contracts typically come with set death benefits, but if your term contract cost increases, you may also be able to increase your death benefit. Some of the other notable features of term life insurance include:
- You Must First Apply – Term life insurance comes with the caveat that the insurance company will first decide how much the applicant is a risk to insure. This process normally includes the insurance company requesting a medical exam, a list of usual hobbies, a description of occupation, and other factors to see what the best rate for the term policy is.
- Contract-Based – Term life insurance is typically a set contract between the insured and the insurance company. The term life insurance policyholder agrees to pay a premium for an agreed-upon period, which can be anywhere from 10 to 30 years. When the person paying for the life insurance premium passes away, the insurance company agrees to pay a predetermined death benefit in cash to a beneficiary. Typically, this benefit is tax-free.
- Term Insurance Has Time Limits – Term insurance is often utilized to cover specific periods, such as when a parent’s children are in college. Knowing how long you need that life insurance coverage is what makes term insurance a good option, as the longer a term insurance policy is set for, the more expensive each month’s payments will get.
What Makes Universal Life Insurance Special?
Universal life insurance is a permanent type of insurance because the coverage lasts as long as the premiums continue to cover the monthly deductions. This allows for a more adaptable and consistent form of life insurance than other policy options.
There are many other features of universal life insurance that make it a more comprehensive form of coverage than many other policies:
- Lifetime Coverage – Universal life insurance policies don not run out of time, and can not be canceled as long as you keep a positive value in your insurance account. This means guaranteed benefits for your family’s future.
- Adaptable Monthly Cost – You will also be able to raise or lower your monthly premium with limits are your life changes. This adaptability allows you to keep your policy stronger even when costs rise or your salary changes.
- Direct Cash Value – Universal coverage also includes a cash value built into your coverage that can grow and earn interest. This cash amount can be used for loans, monthly payments, or even supplement income for your retirement
The decision between universal or term life insurance is thankfully less of a “right or wrong” choice and more of a, “which option is right for you,” choice. If there are periods of your life in which coverage makes sense, but universal coverage may be a bit too comprehensive, then the term is a great option. Likewise, if you feel consistent life insurance will bring the security and safety you looking for, then setting up a universal policy is going to be the correct decision.
Making sure you are informed of the options and coverage available is the best choice and one that you have already made.