YOU ASK:

Term vs. universal life insurance – which is the better option?

WE ANSWER:

Do you need lifetime protection? How much are you willing to spend on life insurance? Would you be interested in using your life policy for investment purposes? Answering these questions is a good departure point for choosing the type of policy that best matches your needs.

Both term and universal life insurance policies have their pros and cons which you should measure against you personal needs in order to make an informed decision.

Term life insurance

If you are young, have a limited budget and short-term need for protection, this is the best insurance option you have.

Advantages of term life policies

Premium rates are the cheapest on the insurance market.
For a really low price you will provide your family with full protection.
You can choose a coverage period in accordance with your particular situation and objectives, such as until your children grow up or until you have paid your mortgage off.
You can always convert to a whole life policy without evidence of insurability if, along the way, you decide that you need permanent coverage.

Disadvantages of term life policies

Term life is an "all-or-nothing" policy, that is, benefits are only received if you die while the policy is in force. If you outlive the policy, you do not get any of your premiums back.
It is hard to predict the future. If, at the end of the policy you find that you need to extend it, that would not be possible to do at the original premium rates.
It can be prohibitively expensive to renew a term life policy if your health has deteriorated or you have reached a certain age.

Universal life insurance

This is the best insurance option for someone who wants to combine flexible-premium permanent protection with an investment opportunity.

Why choose universal life?

You can adjust your premium payments in accordance with your financial situation. In situations when your budget is tight, you can decide to make minimum premium payments, or use the cash value, to keep the policy in force.
You can also increase or decrease the face value amount.
The cash value account serves as an investment account, which is credited with a guaranteed minimum interest rate (usually 3 percent).
You can choose to pay extra towards the cash value when the market conditions are favorable - this way you will reap the benefits which are tax-deferred.

What are the drawbacks of universal life insurance?

Like any other type of cash-value insurance, the cost can be rather steep.
Universal life insurance passes the investment risk on to you: if the interest rate plummets, you risk losing some of the accumulated cash value.
If you choose to make the minimum premium payments, you will not accumulate any cash value, thus ending up owning an expensive term policy.

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