Universal Life Insurance vs Term Life Insurance

• Term life insurance is offered for a set number of years with a fixed premium and death benefit. It can be an affordable choice for temporary financial protection.
• Universal life (UL) insurance offers lifetime coverage and includes a cash value component, but is often more expensive than term.
• To choose between universal and term life insurance, consider your budget, life goals, and financial priorities.
• If you opt for a term insurance policy, you can usually request to convert it to permanent coverage before it expires (based on policy provisions).

Among various types of life insurance policies, term and universal life insurance policies are comparable, as they are two commonly-purchased types. However, each caters to different financial goals, budgets, and lifestyles.

Term life insurance is 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. Universal life insurance is permanent protection that lasts a lifetime, as long as premiums are paid. UL coverage also accumulates cash value and can be used to leave a legacy for your family. Before deciding which type of policy is right for you, compare both to see which fits your life stage and goals.

Term life insurance offers limited coverage for a set period, typically 10 to 30 years, with a few insurers offering 40-year terms. 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.

If you still need protection, you’d have to renew the policy, convert it to permanent coverage, or buy a new policy. Renewal and conversion options vary by insurer. 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.

Read: How to Withdraw Money From Life Insurance Policy

Universal life insurance is a type of  permanent life insurance that offers lifetime protection. Your beneficiary receives the death benefit when you die, as long as premiums are paid. In addition, permanent coverage accumulates cash value that can grow over time. Universal life insurance is also more flexible, allowing you to adjust premiums and death benefits within policy provisions.

How Long Does the Coverage Last?

For term policies, coverage lasts only for the term you choose, such as 20 or 30 years. After the term ends, your coverage ends. If you still need protection, you’ll need to renew or convert your policy to a permanent policy to maintain the coverage benefits (if your policy is convertible). Premiums after renewal or conversion are likely to be higher, as they are based on your age at the time.

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

How Do Premiums Work?

In the case of term life insurance, premiums are often fixed for the length of the term. This means you pay the same amount each month, making it easy to budget for. Universal life policy premiums can vary. You can adjust your premiums as needed, sometimes paying more to build cash value, and sometimes paying less. If you lower your payments, be sure your cash value can cover the policy’s costs, or it could lapse.

Read: Types of Whole Life Insurance

Which One Builds Cash Value?

Only permanent coverage, like universal life or whole life, builds cash value. Term insurance is designed purely for protection, so it doesn’t include the cash value component. 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.

What Happens If I Outlive the Policy?

Universal life insurance offers lifetime coverage, so you don’t need to worry about outliving your coverage.

For term insurance, coverage ends when your term ends. If your family still needs protection, you’d need to renew, convert your term policy to a permanent policy, or buy a separate new policy.

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, but want financial protection during critical years.

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.

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.