Universal Life Insurance vs Term Life Insurance

Term Life vs Universal Life Insurance: Quick Comparison

Understanding Term and Universal Life Insurance

Life insurance helps provide financial security for your family if you pass away. There are different policy types to choose from, and they fall into two main categories: term life insurance that covers you for a set number of years, and permanent life insurance that lasts a lifetime. Universal life is a kind of permanent life insurance.

What is Term Life Insurance and How Does It Work?

Term life insurance offers limited coverage for a set period, typically 10 to 30 years, with a few insurers offering 40-year terms. Here's what you should know:

• The premium amount and death benefit typically remain fixed during the term period. 
• If you die while the policy is active, your beneficiary receives the death benefit. But, if you outlive the policy, the coverage ends and you don’t get any money back except when your policy includes a return of premium rider. 
• If you still need protection after the term ends, you’d have to renew the policy, convert it to permanent coverage, or buy a new policy.

Term life insurance is designed for protection only, so even though it’s an affordable alternative for long-term security, it doesn’t build cash value. It’s a good choice if you want a straightforward and affordable protection to help cover life’s major milestones, like paying off a mortgage or providing for a child’s education

Note:Renewal and conversion options vary by insurer. 

What Is Universal Life Insurance and How Does It Work?

Universal life insurance is a type of permanent life insurance that offers lifetime protection. It allows you to adjust premiums and death benefits within policy provisions. You can pay more or less premiums over time and you can choose between level or increasing death benefit.

UL is an umbrella term  for three main types: fixed universal life, indexed universal life (IUL), and variable universal life (VUL) and cash value growth differs depending on the sub-type:

• Fixed UL: Cash value growth is credited based on interest at a rate declared by the  insurer.
• Indexed UL: Cash value growth is tied in part to a market index, with caps on gains and floors to prevent losses. 
• Variable UL: Cash value is invested in sub-accounts similar to mutual funds.

The cash value of a permanent policy works like a savings account. You can withdraw from the cash value or take out a policy loan if needed, and if there is enough cash value left to maintain coverage. It’s important to understand that accessing your cash value could reduce the death benefit that is ultimately paid to your beneficiaries.

Since universal life insurance is permanent coverage, your protection never expires. As long as premiums are paid, coverage lasts a lifetime.

Cost Comparison: Is Universal Life Insurance More Expensive Than Term?

Universal life insurance is more expensive than term life because it offers lifetime coverage and includes a cash value component. Though the actual cost depends on your age, lifestyle, gender, coverage amount and other factors, here are some estimated annual premium costs for a coverage amount of $500,000.^1-2

Pros and Cons of Term vs. Universal Life Insurance

Term and universal life insurance caters to different financial goals, budgets, and lifestyles. Term life insurance is affordable but comes for a limited period; universal life, on the other hand, offers lifelong protection but is expensive and may be complex to understand for some people.

Term Life Insurance Pros

• Costs are often lower in comparison to a permanent policy due to less risk exposure.
• Term policies are straightforward. No cash value, withdrawal, or loans are involved that can make the policy complex.
• Premiums are often fixed for the length of the term making it easy to budget for.

Term Life Insurance Cons

• After the term ends, your coverage ends.
• Term policy doesn’t offer the cash value benefits, so you cannot access funds in emergencies
• Premiums after renewal or conversion are likely to be higher, as they are based on your age at the time.

Universal Life Insurance Pros

• Universal life insurance offers lifetime coverage, so you don’t need to worry about outliving your coverage.
• You can adjust your premiums as needed, sometimes paying more to build cash value and sometimes paying less. 
• Unlike term life, universal life insurance policies also accumulate cash value and can be used to leave a legacy for your family.

Universal Life Insurance Cons

• Premium costs are often higher in comparison to term life policies.
• If you lower your payments, be sure your cash value can cover the policy’s costs, or it could lapse.
• Cash value growth is tied to growth at a declared interest rate or market-linked returns, so it could be complex to understand how premiums, costs, and cash value work together.
• Though cash value offers higher growth potential, returns are not guaranteed (except GUL), and it's risky.

Note: Withdrawals and policy loans through a universal life policy may reduce the death benefit and available cash value for the beneficiaries. In some cases, they may trigger taxes, especially if the policy lapses with an outstanding loan or if withdrawals exceed the amount of premiums paid. If you’re opting for universal life for its cash value benefit, it’s good to understand what can impact your long-term coverage benefits.

Which Type of Life Insurance Should You Consider?

The choice between term and universal life comes down to a few things: your budget, your long-term goals, and your financial responsibilities. Here are guidelines to help you choose:

When Term Life Makes More Sense

• You need temporary coverage to meet long-term expenses or debts.
• You don’t want to pay a high premium, so you want an affordable life insurance plan.
• You have young children and a long-term mortgage.
• You have separate investment plans, so you don’t mind compromising on the cash value accumulation.

When Universal Life Makes More Sense

• You want lifetime protection.
• You want to build a legacy.
• You want the flexibility to adjust premiums or death benefits.
• You want to accumulate cash value for potential long-term savings

Can I Convert My Term Life Policy into a Universal Life Policy?

Yes. Most insurance companies offer conversion options on their term policies. This means you can convert your term life policy to a universal life policy before the term expires. This provides you with lifetime coverage without a new health exam. However, your premiums will be higher, since your premium rates will be based on your age at time of conversion. And, permanent life insurance traditionally costs more than term.