Universal Life Insurance vs Term Life Insurance
Universal Life Insurance vs. Term: Which Will It Be?
Life insurance protection can be a complex financial instrument with terms and requirements that are confusing to those who are not in the industry. When it comes time to decide what type of insurance you need, you are going to see two primary types of life insurance; term life insurance and universal life insurance.
Many people have differing opinions on these two types of life insurance some say term life insurance is the way to go – and use the monthly savings to invest in something else. Some say Universal life insurance, with its buildup of cash inside the policy, is an investment in and of itself – no need for anything else. Let’s get some basics of insurance in general then look at these two types of life insurance.
What is Term Life Insurance
Term Life Insurance is a type of policy that has a premium that lasts a specified period (10, 20, 30 years) and has a level death benefit. At the end of the term, the premium skyrockets. The benefit of term policies are the cost. You are paying just for the life insurance and not an investment vehicle. Some call term insurance, pure insurance.
Term life insurance is generally more affordable than permanent insurance because it lasts for a specified period and only has a level death benefit without a cash buildup within the policy.
This is an excellent choice for the young, or younger family, where the person who is the primary source of income obtains coverage in case of premature death. It may even work if an earner is a little older and is head of a household. In situations like this, they could take a term policy for 20 years to cover the family until retirement. At that point, the policy would expire and no need to renew.
For many people, life insurance can not have the same cost as a car payment. Given the overall affordability, term life insurance fits the bill perfectly. There could be a substantial death benefit, maintained at a very reasonable rate, and the peace of mind it provides is a comfort to the family. They can insure against an untimely death at a low rate while maintaining a more substantial face value.
What are the types of Universal Life Insurance
Universal Life Insurance is the type of policy that lasts for the entire lifetime of the insured. There are two components to a universal insurance policy. First is the cost of insurance, this is the same as a term policy where the premiums increase every year. The second is the investment part of the policy. The type of investment depends on what type of policy it is.
There are three types of Universal Life Insurance and they each have different investment components.
- Guaranteed Universal Life
- Indexed Universal Life
- Variable Universal Life
Guaranteed Universal Life
Guaranteed universal life policies typically guarantee a 4% rate of return on the investment portion of the policy. Using this guaranteed 4% rate of return they calculate the minimum monthly premiums to keep the policy active to age 121.
This policy is great when you want to have a permanent policy at the lowest cost.
The policy includes the option to overfund or pay more premiums than required to build more cash value at a 4% rate of return.
This is the policy type we recommend because it has the best value for a permanent policy.
This type of policy is also permanent, but is linked to a stock index (like the S&P) and offers cash savings within the policy and a chance to follow market trends. When money is borrowed from the account, repayment of the loan is required, or the death benefit will decrease by the amount owed to the account.
This type of account builds a value based on the index chosen, where part of the premiums funds the investment in the index.
This policy is usually sold with guarantees to not lose money. The problem is that they are also capped on the amount you can gain. These policies become complicated and oversold to consumers.
These may be a good choice for those that have already maxed out their 401k and IRA, and are looking for an additional tax-deferred investment vehicle.
Variable Universal Life
This type of universal life has the same features as the basic universal life policy, but with an extra component.
The agent who sells this account must be registered to sell stocks and bonds. The variable component for this type of life insurance has a cash value invested in small sub-accounts, which act similar to a mutual fund. Depending on the kind of investments made, the cash value can increase, or decrease. It is important to note that the income in this account can be lost entirely.
People who may benefit from a universal life policy are those that have already maxed out their 401k, IRA, and wish to play the market in another tax-deferred investment vehicle.
Term Life Wins (For Most People)
I think for 99% of the population, term insurance is the way to go. If you are in the top 1% and have funds to invest, or are doing estate planning, then a universal life policy is a great option.
Universal life policies are 5 to 20 times more expensive than term policies. You can get low-cost term insurance policy for the cost of a phone bill.
Life insurance can be a good investment. I think you should first have an emergency savings account, and max out your 401k and IRA accounts before considering a life insurance policy as an investment vehicle.
As many advisors say, myself included, buy term and invest the difference.