Difference Between Term and Universal Life Insurance
Life insurance is a private contract between you and a life insurance company. The life insurance company agrees to pay a death benefit upon your death. This death benefit normally goes towards paying off your financial obligations that you've accumulated over the years, such as medical bills, loans or even credit cards. When purchasing life insurance, two common types are term and universal life.
Other People Are Reading
-
Types
-
Term life insurance is the most basic life insurance contract you can buy. Premiums are paid in exchange for death benefit protection. Universal life insurance uses an annual renewable term life insurance that is funded with a separate cash value account. Even though the cost of insurance is unbundled from the cash value, the contract is comprised of both the cash value and the term component, and you cannot have one without the other. The reason it is "unbundled" is because the costs of the term component are clearly defined and the premiums are paid out of the cash value of the policy.
Significance
-
Term life insurance relies on premiums being paid by the insured or policy owner every month. If the premiums are not paid, then the policy lapses. Universal life also depends on the premiums being paid every month. However, the premiums are paid indirectly through the cash value account. Money is deposited into the cash value and then taken from the cash value account when premiums are due and after interest has been credited to the account. Universal life is also typically termed to age 120, whereas most term policies extend to a maximum of 30 years.
-
Benefits
-
The benefits of a term life insurance include its simplicity and the fact that the premiums are low for the duration of the term. The benefits of a universal life insurance policy are that it lasts for the life of the insured as long as premiums are paid and sufficient to cover the cost of insurance. Any excess premium grows tax-deferred and can be withdrawn or borrowed from the policy later on for any purpose.
Misconceptions
-
A common misconception is that universal life insurance and term insurance are fundamentally different. While there are some important differences in how the policies are funded and how they work, they are both, at their core, term life insurance policies.
Considerations
-
Before choosing one type of policy over another, compare the costs and the benefits of each policy type. Because of the cash value component, universal life insurance often has premiums that are higher than term life insurance. These policies are also, however, designed to cover you until age 120. Term life insurance covers a temporary insurance need extending, in most cases, to a 30-year maximum term.
-
References
- Photo Credit dix dollars, 10 dollars, ten dollars, dieci dollari, ten box image by Blue Moon from Fotolia.com
