Term Life Insurance vs. Universal Life Insurance
There are many kinds of life insurance but generally they will fall into two types; term life insurance and permanent life insurance. For an explanation of life insurance you can check out What is Life Insurance?
Today, I wanted to explain in simple terms, excuse the pun, the difference between term life insurance and permanent life insurance, specifically universal life insurance (or UL for short). Also, I’m going to show you an example of the premiums (payments) for each policy.
Term Life Insurance
Term life insurance is inexpensive in comparison to permanent insurance, and is designed to meet temporary needs. Most companies will allow you to choose a 10, 15, 20, 25, or 30 year term. The longer the term the more expensive the premium. At the end of the term the policy will either terminate or it can usually continue on, but a much higher cost than before. Term insurance is probably the best choice for most individuals. Most Americans are looking to protect their spouse, children, mortgage and income in the event on an unexpected or premature death. Term life insurance accomplishes this and at a great price. At a specific time in the future you will most likely not have the same obligations or responsibilities that you do today. Your children will be grown and not dependent on you anymore, ( hopefully), your mortgage will be paid down or paid off, and you will be closer to retirement age and theoretically you may have less income to protect.
Many Financial Advisers Recommend Term Life Insurance
The well-known financial experts you see on TV like Suze Orman, Dave Ramsey and Clark Howard are big advocates of term life insurance. Many financial advisers including Orman, Ramsey and Howard recommend that, in most cases, the best choice for most people is to buy term life insurance and invest the rest or the money that you would be paying for permanent life insurance on your own (outside of your life insurance policy).
Universal Life Insurance with a No-Lapse Guarantee
Universal life insurance on the other hand (often called a UL policy for short) is a type of permanent insurance that provides lifelong protection with an ability to accumulate a cash value on a tax-deferred basis. Unlike term insurance, a permanent insurance policy will remain inforce as long as you pay the premiums. A great and popular option available today is called a “No-Lapse Guarantee” Universal Life Policy. With a traditional UL policy it has the possibly of lapsing in certain circumstances. For example, if interest rates fall lower than was expected and or when the cash values in the policy no longer cover the cost of the insurance. However, the “No-Lapse Guarantee” Universal Life Policy will not lapse regardless of the market conditions. The death benefit is guaranteed to your beneficiary as long as you make your premium payments!
Mainly due to the cost, most of the universal life policies I write are for estate planning purposes and for higher net worth individuals. Other common uses for universal life insurance coverage would be if you have a dependent that will need care after you are gone, funding a buy/sell agreement, a business owner who needs to buy out a partner or needs business continuation, a key man or key person to a company and needs to be covered. Also, this type of policy is for executive bonus agreements, and for non-qualified deferred compensation agreements or plans, and for business executives. Another note when shopping for universal life insurance is to make sure you see the illustration. (A basic illustration will show the guarantee and non-guarantee elements of the policy.) For more information on estate planning life insurance please see How can life insurance protect my children, heirs, business and charities from taxes?
What are the difference in costs between Term Life Insurance and Universal Life Insurance?
Here is an example of the costs:
A 40 year old male who is at the Preferred Plus rate class in class in Texas seeking a $500k policy.
Term Life: 10 year term=$25.11 a month 15 year term=$30.96 a month 20 year term= $36.36 a month and a 30 year term=$62.01 a month
Permanent Life (using a no-lapse guarantee universal life policy guaranteed to age 121): $233.67 a month
(Using rates as of October 2012 with American General Life (AIG). Your rates will depend on your evidence of insurability and the insurance company’s underwriting guidelines.)
As you can see for most people term life insurance is going to be the best choice. You can get a great deal of life insurance protection and peace of mind for pennies on the dollar. However, for others, especially wealthy and higher net worth individuals, a permanent life policy may be your best solution to protect your family, estate, business, charitable foundation and legacy.
If you have any questions on term life insurance and a “No-Lapse Guarantee” Universal Life Policy please do not hesitate to give me a call.