What is the difference between Term Life Insurance vs Universal Life Insurance?
Both have the same goal: Protect your family and provide peace of mind.
What is Term Life Insurance?
Term is the most cost-effective life insurance offering coverage for set period, usually 10, 15 or 20 years. When the policy expires you may have the option to renew or convert your policy to a permanent policy.
You should know.
With Term Insurance:
Only pays a death benefit
When you die, the insurance company pays your beneficiaries the death benefit. Universal also pays the death benefit, but along with the investment portion that has grown over time.
Is less expensive
The reason is simple. There is less risk as there is only a portion of time that you would be covered. Universal policies will always pay out at some point as it is lifelong protection.
Might not be renewable
If you purchase a 20 year term and during these 20 years you have a health issue, you may be unable to renew your policy. Most policies will require a new medical and of course, higher premiums due to your age. However, you may have the option to convert your policy to a permanent policy.
Premiums remain the same
Not in every case, however, the most popular is a level term where you pay the same premium during the entire policy. There are Decreasing Term where the death benefit decreases over time, such as paying off a mortgage, and Annual Renewal Term where you only pay for the insurance that you actually use for that year. Each year your insurance increases as you get older.
What is Universal Life Insurance?
This is lifelong coverage which means the insurance company will make a death benefit payout at some point. Your policy never expires.
Consider this an investment that gives you a tangible asset that you can borrow from, have flexible payments or make no more payments.
With Universal Life Insurance:
Borrow Against your policy
You can take out a loan against your policy. The cash value can serve as collateral for a loan similar to a home.
You can choose to end your life insurance early and withdraw the cash from the policy.
Pay your premium
You have the option to stop making payments and have the investment portion continue to keep the policy active.
Adjust Your Premiums
You have the freedom to adjust the payments to suit your situation. For example, if you lose your job, you can stop making payments for a few months and the investment can make these payments for you without cancelling the policy in the case of term insurance.
Premiums increase with age
In most cases, premiums increase with age, however, there are other options. This is beneficial when you are younger so that you pay the minimum amount for insurance and put the most amount in your investment to allow this to grow as much and as soon as possible.
You Earn Interest
The investment portion of your policy earns you interest. Investing this in the market and through various diversified investment options can pay large returns, especially if you are investing for the long term.
The insurance company knows it will make a payment. With term insurance, the insurance company is taking a gamble that you will not die within a certain period.
What is the best option when it comes to either Term of Universal Life Insurance?
These policies are designed for different purposes and here are a few main reasons one or the other might be best for you.
Term Life Insurance is best:
If you are on a budget
Term life is the most cost-effective option.
When you have short-term needs
If you are looking for coverage in the years you are working and paying bills, your policy will pay a lump sum to cover the loss of income to your family. It can also be used to pay off mortgages, children’s education and keep your family at the same standard of living for X number of years.
If your circumstances will change
Term can cover you now so you can re-evaluate your situation soon, or if you are experiencing a major life change such as divorce or a new family.
If you need simplicity
Term is simple. There is a payment and a death benefit. Permanent insurance can be more complex.
Universal Life Insurance is best:
When you need lifetime coverage
Do you have a sizable estate to protect? Do you want to provide a guaranteed inheritance? Would you prefer to offer tax free money that bypasses probate?
If you need flexible payment
If you can’t commit to paying a fixed amount or your money fluctuates, this feature is very attractive.
When you are interested in an investment
Monies that you place in the investment portion make money and it paid to your beneficiary tax free. This investment is also available to you when you are living because this is an asset.
If you are young and healthy, but you have a family history if issues
Does your family have a history of cancer, heart disease or strokes? It’s a good idea to lock in at a good rate as soon as possible when you have no health complications.
What about buying both?
Now your thinking! Purchasing a larger amount of insurance now in your earning years and at the same time, a permanent policy for your lifetime could be the best of both worlds for you.
The purpose of life insurance is to give you and your family a sense of financial security. As you go through life, your circumstances and needs may change, and your insurance should also reflect this.
The Bottom Line
When considering the pros and cons between term and permanent insurance, you need to consider your financial goals. Short term needs on a budget or long-term protection and security? Maybe an investment with a cash value is more appealing.
Whatever your goal, call me to discuss which best suits your needs and let’s plan with confidence. Do something today that your future self will thank you for.
Talk to your financial advisor, that’s me!
Let’s talk about the best places to put your money for both investment and protection.
I will show you options based on your personal situation, so that you can have peace of mind!
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Note: This is provided for informational purposes only and we cannot be held responsible for any decision made by reading this post. For specific advice about your personal situation, click here to connect with me.