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Universal life vs. term life insurance
The coverage you need depends on your finances and lifestyle.
Term life insurance coverage ends after a certain amount of time, while universal life is with you as long as you pay your premiums. Compare these two life insurance options, thinking about needs, cost and how long you need coverage.
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Universal life vs. term life
| Term life insurance | Universal life insurance | |
|---|---|---|
| Usually easy to buy | ✔ | |
| More affordable | ✔ | |
| Choose how long your coverage lasts | ✔ | |
| Lifelong protection | ✔ | |
| Fixed premiums | ✔ | |
| Flexible premiums | ✔ | |
| Builds cash value | ✔ | |
| Investment component | ✔ | |
| No-medical-exam policies available | ✔ | ✔ |
| Choose |
Need a crash course on life insurance?Before deciding between term or universal life insurance, familiarize yourself with the basics of life insurance.
What is term life insurance?
Term life insurance is the simplest and cheapest most affordable type of life insurance. You pay a fixed premium for a set number of years. If you die during the policy, your beneficiary will receive a death benefit.
What should I know about term life insurance?
- It provides coverage for a set time.
Get coverage for 10, 15, 20 or 30 years — and once the term expires you can either renew your policy, convert to a permanent policy or let it lapse completely. - It’s more affordable than universal life.
The insurer has a lower risk of paying out the death benefit before the term ends. Permanent policies, on the other hand, provide lifelong protection, so the insurer knows it’ll have to pay eventually - You have the option to renew your coverage when your term ends.
Once your term ends, you can either renew your policy or convert to a permanent policy if you’re younger than 70.
What is universal life insurance?
Universal life is a permanent policy, offering lifelong coverage as long as you keep paying your premiums. The major difference between universal life and other permanent policies is that the payments are flexible.
Like term life, universal life offers a tax-free death benefit. However, it’s more of an investment. A portion of each premium is invested to give your policy a cash value. Once you build up sufficient savings, you can tap into your policy during your lifetime.
What should I know about universal life?
- You can borrow against your policy.
After 10 to 15 years, you can borrow from your cash value to pay for things like a down payment on a house. - You can adjust your premiums.
As your life changes, you can change your premiums. And once you’ve accumulated cash value, you can use it to pay your premium. However, this adjusts the amount of death benefits your beneficiaries will receive. - The premiums increase as you age.
Unlike term life insurance, universal life premiums can rise over time. - You can earn interest on the cash value.
The interest rate is set by the insurer and can change according to the market. It’s also hinged on your insurer’s investment performance, but it can’t dip below the policy’s guaranteed rate.
Should I buy term life or universal life insurance?
Deciding between universal or term life insurance depends on your financial situation and lifestyle.
Consider buying term life insurance if …
- You’re on a budget.
Term life is the cheapest type of life insurance. And the younger and healthier you are, the lower your premiums will be. - You have short-term needs.
If you only want coverage for the years that you’re paying the bills, this coverage can offer your family financial security. Get coverage to pay the mortgage, car payment and get your kids off to college. - You predict your circumstances will change.
With term life insurance, you can reevaluate your policy as you near its expiration date. That means that if you’ve experienced major life changes, you can adjust your next policy to reflect that. - You’re interested in a simple life insurance policy.
Term life is pretty straightforward, simply pay your premiums and get a payout if you die. No need to worry about investments or fluctuating premiums.
Consider buying universal life insurance if …
- You need to protect your assets.
If you want to protect a large estate or provide for your children or grandchildren, universal life insurance can offer a solid inheritance. - You’re looking for flexibility with payments.
Maybe your income fluctuates or you have money stashed away in other investments. If you can’t commit to paying a fixed premium each month, this policy’s flexibility feature is very attractive. - You want to access the money in your policy.
If you’re planning to buy a home, get married or apply for a loan, a universal life policy might be a good fit. Once you’ve built up substantial cash value, you’ll be able to borrow against your policy. - You’re treating life insurance as an investment.
If you want to invest your life insurance to build on your cash value, universal life can give you a return on this investment. However, there is risk and premiums can be high.
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Can I buy both term life and universal life insurance?
Yes. You can ladder your insurance, or hold two or more life insurance policies at the same time. When you apply for additional coverage, be prepared to explain why you want more coverage and be ready to show proof that you can pay for both.
These are some of the reasons why you might want to purchase both term and universal life insurance:
- You can’t afford the coverage you want.
Many families start with term life insurance because it’s the cheapest option, and then buy a permanent policy later when they’re earning more money. - You need more coverage.
Maybe you bought a home, got married or had a child. You may consider adding coverage to cover those new financial obligations. - You’re applying for a loan.
Life insurance can serve as collateral and assure the lender that you have every intention of paying the money back.
Bottom line
When you’re deciding between term and universal life insurance, think of your financial obligations and goals. If you have short-term needs or a tight budget, a term life policy can offer protection and security for a specified period of time. If you’re interested in treating life insurance as more of an investment, you might want to look into a cash-value policy like universal life.
Once you’ve settled on a policy, compare providers to make sure you’re getting the most value for your money.
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