Which Is Better: Universal or Term Life Insurance?

By Amy Jorgensen

  • Overview

    Personal finance experts recommend purchasing life insurance as early as possible. Premiums will be lower because you'll be a better risk and pay longer than an older person would. However, choosing the appropriate type of policy to best meet those needs can be a challenge. Two of the most common choices are universal and term life insurance.
  • Pros of Universal Life Insurance

    Universal life insurance is considered permanent insurance. Regardless of how your health changes in the future you'll have a policy as long as you continue to pay the premiums. Your insurance needs might change over the next 20 to 80 years and universal life insurance is flexible enough to accommodate those changes. If you need to add more coverage down the road, the policy allows you to do this, although your premium will change. Another benefit of universal life insurance is your policy earns tax deferred interest annually which means you can increase the value of the policy. In some cases, you can use this extra value to lower your premiums.
  • Cons of Universal Life Insurance

    The premium payments required on your universal life insurance policy are not always sufficient to build up cash value for the policy. Without that cash value, your premiums are going to be higher. However, if you continue to make premium payments that are too small, insurance companies can consider the policy lapsed and discontinue your coverage. Part of the premium is invested into the insurance company and their returns determine how fast the cash value of your policy grows. If the company does poorly, your policy's cash value may grow very little beyond the guaranteed minimum interest rate (normally about 4 percent) and that could lead to higher premium payments down the road.

  • Pros of Term Life Insurance

    Of all the life insurance options available, term life is the most affordable. The low cost is attributed to two facts about these policies: they do not build any cash value nor are they considered permanent insurance. As the name suggests, the person insured is covered for only a specified term. Most of the policies can be renewed, however. Term life insurance policies are usually convertible, too. That means before the end of your term life insurance policy you can convert it into a universal or whole life policy.
  • Cons of Term Life Insurance

    One of the already mentioned drawbacks is term life policies do not build any cash value. While that makes them cheaper, it also means no matter how much you pay into them they will never be worth any more than the death benefit. While term life policies can be renewed up through a certain age (sometimes as high as 85), the premium increases with each renewal.
  • Which Type of Life Insurance is Better?

    While both universal and term life insurance has their pros and cons, the final decision about which is the best choice depends on your circumstances. If you can afford a sizable universal life policy and its premiums that might be the best idea because you'll have permanent coverage that should continue gaining cash value. However, if you can't afford enough life insurance with a permanent policy, consider choosing a term life policy that you can convert into a permanent one when your financial situation improves.
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