The difference between Term & Universal Life Insurance

Author:Shelden SmollanChief Experience Officer
Shawn Redford
Reviewed by:Shawn RedfordChief Business Development Officer
4 February 2022
7 Minute Read

Learn the difference between Term Life Insurance and Universal Life Insurance. Understand which life insurance policy is best for you.

An agent helping a young couple

Life insurance policies can shield your dependents from taxes, and a death benefit can provide for loved ones you want to take care of in the event of your passing. A life insurance policy can also cover outstanding debts such as mortgages, personal loans and student loans. After retirement, this type of insurance can ensure your beneficiaries have the funds for funeral and final expenses.

When choosing a life insurance policy, consumers must decide among a wide range of options and understand the similarities and differences between various policies. This article is going to explain the difference between universal life insurance and term life insurance. So that you can compare these two life insurance options, think about cost and the length of coverage you need.

What is Term Life Insurance?

Term life insurance is the simplest and most affordable form of life insurance. It has a fixed premium for a set number of years and is ideal for the lowest cost of protecting dependents. If you pass away during the life of the policy, your beneficiaries will receive a death benefit. These features make term life insurance an excellent solution if you need lowest cost coverage for a specified period of time, like financing a house or paying off a mortgage.

What should you know about Term Life Insurance?

It offers protection for a certain period of time.

You can opt for coverage for a certain number of years or to a certain age and after that, you can choose whether to renew your coverage, convert it to permanent coverage or let it lapse.

It is less expensive than Universal Life Insurance.

The term life insurance policy provides the insurer with a lower risk of paying out the death benefit before the end of the policy’s term. Permanent policies, however, guarantee lifetime coverage, so the insurer knows they will eventually have to pay.

When the term of your life policy ends, you will have the option to renew your coverage.

On the anniversary of your policy (or when your term ends), you can either renew your policy or convert to a permanent policy, which is often recommended for those who still need some sort of coverage at this time.

What is Universal Life Insurance?

Universal life is a form of permanent life insurance that you may want to consider if you want lifetime coverage and long-term savings and have some investment knowledge. The main difference between universal life and other permanent policies such as whole life insurance is that the payments can be adjusted. Please note, there is a minimum amount that must be paid.

The policy also has a savings component that may be used to accumulate a cash value. You may also adjust your premium payments and death benefit.

What should you know about Universal Life Insurance?

You can borrow against the amount of money you have in your insurance policy.

At some point you may be able to borrow or withdraw from your cash value to help fund other things such as a down payment on a house or education.

Your life insurance premiums can be modified.

Once you’ve accumulated cash value, you can use it to change your premium payments. However, this may reduce the amount of death benefits your beneficiaries will receive.

The premiums you have to pay can increase as you age.

Unlike term life insurance, the premiums for a universal policy coverage amount increases over time, however in the earlier years it tends to be much less expensive.

You can earn interest on the cash value of the life policy.

The interest rates are decided by the funds of your insurer and can change depending on market conditions. However, the return on your investment depends a lot on your insurer’s funds investment performance, which may dip below the policy’s projected values.

What’s the difference between Universal Life Insurance and Term Life Insurance?

The main differences between them are the length of time the policy lasts, whether it accumulates a cash value, and what you might expect to pay for it. Experior Financial Group associates are well versed in these types of insurance policies and can help answer questions about life premiums and any other questions you may have.

Should you buy Term Life or Universal Life Insurance?

When choosing between universal or term life insurance policies, it is important to assess your financial situation, lifestyle and retirement goals. The value of life insurance depends heavily on what you really need and want out of the policy and your overall financial goals.

You should consider buying a Term Life policy if:

  • You are limited in your spending and are on a strict budget
    Term life insurance is the most affordable type of life insurance. The younger and healthier you are, the lower your premiums will be.
  • Your needs are short-term
    If you just want coverage for the years that you’re paying the bills or have an added expense for a specific amount of time. This is a solid way for you to protect your families finances in the untimely event of a premature death. You’ll have provided an income from life insurance to pay your mortgage, car payment or to get your children started in post-secondary education.
  • You expect that your circumstances will change
    When you have a term life insurance policy, you can reevaluate your coverage as the policy approaches its expiration date. That way, if you experience major life changes, you can adjust your next policy investment strategy accordingly based on this new information.
  • You’re interested in straightforward, cost-effective life insurance policies
    A term policy provides your beneficiaries with a cash payout if you die within the policy’s term. Your family is protected and provided for, reducing future financial stress.

You should consider buying Universal Life Insurance if:

  • You need to safeguard your assets and investments
    Universal life insurance can ensure that your loved ones have the resources they need to make their way in the world. It can help you protect a large estate and provide cash value.
  • You’re seeking a flexible plan that allows you to make premium payments on your own schedule
    This policy’s flexibility feature is attractive if your income fluctuates and you have the ability to over fund it in the early years to build up savings or to have it pay for itself in the later years.
  • You want to be able to access the funds you have in your insurance policy
    If you plan to buy a home, pay off credit cards, get married or apply for a loan, consider buying a universal life policy. Once you’ve built up substantial cash value, you can borrow against the policy. Your Experior Associate can help guide you on if this is a right approach for you.
  • You’re treating life insurance as if it were an investment account
    If you use your life insurance to build up your overall assets, universal life can offer a return on this investment. However, there is risk with this investment component and premiums can be high. This is a strategy that should include an Experior Associate to help make sure this is the right option for you.

Why should you choose Experior Financial Group to help you with buying life policies?

Part of our success is due to our client solutions built around our proprietary Expert Financial Analysis software (EFA). This software provides clients with a simple easy-to-follow financial management program offered exclusively through Experior Associates.

The Expert Financial Analysis will give you a clear, accurate analysis of where you are financially alongside our Associates who will guide you through the steps you need to take to reach your financial goals. Our Associates will be able to assist you in selecting the best life insurance option for your needs, whether universal life insurance, term life insurance or whole life insurance.

We will also assist you in exploring different investing options for your retirement and can help you get out of debt years faster. Our company works with many insurance and investing partners that gives policyholders access to the best rates and products. In addition to insurance and investing recommendations, our Associates can refer you to another company for home and car insurance.

Frequently Asked Questions

A life insurance policy’s death benefit is a tax-free, lump-sum amount that can be used to replace your income so your family can maintain their standard of living. It can provide for your children or dependents, pay for funeral expenses, pay off your debts and make a charitable donation, whatever the desires of the insured was and the needs of the beneficiary.

To protect your family, experts generally recommend purchasing life insurance coverage worth a minimum of 7 to 10 times your annual salary. To learn more about your options, talk to an Experior associate who can help you determine how much and what kind of life insurance is appropriate for you through our EFA.

The amount of your premium payment will depend on the type of life policy you choose and the details of your individual medical, smoker status and age. You can expect premiums to differ depending on if you buy universal life, term life or whole life insurance.

Whole life insurance is a type of permanent life insurance that combines a guaranteed death benefit with a savings component called a cash value. These policies may also increase in value over time. Find out more about whole life insurance with Experior.

Shelden Smollan
Shelden Smollan, Experior Financial Group's Chief Experience Officer, has spent more than 45 years working in the fields of Life Insurance and finance. He is an excellent insurance sales and management executive with exceptional strategic thinking, marketing, and leadership abilities. He has been Experior Financial Group Inc.'s Chief Experience Officer for the past six years, and his vision and expertise have been instrumental in the company's growth and development. By arranging meetings between agents and carriers so that our team of associates can learn from them and draw inspiration from them, he has assisted our IMO in expanding.