Term Life Insurance vs Universal Life Insurance Which Should I Get?

Term life insurance vs Universal Life Insurance

The two most common sorts of life insurance policies are the Term Life insurance policy and the Universal Life insurance policy. These are most popular amongst US citizens. There are some obvious differences between these two.

Term Life as the name implies, is for a certain time span ranging from 10-30 years mostly. Whereas a Universal Life insurance policy lasts for a lifetime. Its death benefit pays out when the policyholder expires.

The next difference between term life and universal life is the amount of monthly cash premium payments. Since universal life policy is a permanent type of policy so obviously its premium payments are costlier. Although these are leveled premiums, they do not have any increments over the lifetime of the policyholder.

As for the term life premiums, the amount is significantly lesser, compared to universal life premiums. Nevertheless, the term life premiums have annual increments on them. If the term policy expires and a policyholder outlives his term, he has to buy a new term policy. This can be rather expensive and its premiums would be way higher than a decade, or two ago.

Last, but not least, the term life offers no cash value component while the universal life insurance policy has a cash value. The Universal Life insurance policy cash value component is accumulated over decades. It has a considerable amount of tax-deferred cash to offer for any emergencies during the lifetime of a person. 

A policyholder can borrow a loan from this cash value in the future to make monthly premium payments or pay off any large pending mortgage loans or credit card debts.


How does a Term Life Insurance Policy work?

It is quite simple; you buy it by specifying the time period such as 10-30 years. You keep up your affordable monthly premiums. Thus it stays active till you discontinue premiums. If you die within the specified time period, your surviving loved ones get the cash benefit from it to pay off your final burial and funeral expenses, medical bills, outstanding mortgage debts, and loans.

For some time, the tax-deferred death benefit payout will last as a substitute for your left-behind family members, as their source of income too. Term Life insurance policy is awfully plain and if one cannot continue the premiums in his lifetime, its policy cancellation is free of cost too.

Top 5 Term Life Insurance Companies till July 2023

However, do ensure choosing the most well-reputed Term Life insurer Agency. The top 5 insurance companies based on ratings till July 2023 are:

  1. Best Overall: Protective
  2. Best for Cheap Insurance: Banner
  3. Best for Same-Day Coverage: Haven Life
  4. Best for offering Living Benefits: Mutual of Omaha
  5. Best for Financial Stability: MassMutual

 Is a Universal Life insurance policy worth it?

A Universal Life insurance policy is one of the two types of permanent life policy. It lasts till the lifetime of the policyholder. If a person reaches the age of 100 years, the universal life policy matures but the best part is the monthly premiums are paid from the cash value, onwards. A person can discontinue his premiums, his dependents will still get a complete death benefit payout to counter their cash crisis in the future.

Universal life policy has costlier monthly premium payments. It has a cash value component to it, as opposed to the term life insurance policy. The benefit of it is that any policyholder can withdraw huge lump-sum cash from it in time of need, during his lifetime. The cash that gets saved in the cash value is tax deferred.

How do your universal life premium payments split up three ways?

The monthly premium for a universal life insurance policy is distributed 3 ways: 

  1. Part of it goes to the death benefit payout.
  2. Part of it goes to the accrued cash value.
  3. Part of it goes to the insurance agency for its operating and overhead costs. 


How and why do you cancel your universal life insurance policy?

If due to any reason like:

  • Death or financial independence of your beneficiaries,
  • Or collecting sufficient savings in a high-yield bank account,
  • Or paying off your credit card debts,
  • Or returning your loans,
  • Or due to rising inflation, your inability to keep up with the monthly premium payments.

If you decide to let it lapse or want to cancel it then the Universal Life insurance policy charges a substantial cancellation fee which is usually deducted from your cash value.

Top 5 Universal Life Insurance Companies till July 2023

However, do ensure choosing the most well-reputed Universal Life insurer Agency. Top 5 insurance companies based on ratings till July 2023 are:

  1. Nationwide
  2. Transamerica
  3. New York Life Insurance
  4. North Western
  5. Mutual of Omaha

Let’s try to understand the difference between term life and universal life insurance with a simple example

Let’s try to simplify this further with an example: if a 21-year-old guy buys term life and pays a monthly $20 premium, the same person would have paid $100 per month for a universal life insurance policy.

While it seems better to buy term life apparently, it is temporary and the premiums incur increments annually. The guy at 45 years would be paying $50 for the same term life, while if he had bought universal life policy, he’d be entitled to pay the same $100 till his death.

What is the biggest drawback of a term life insurance policy?

For outliving a term life, there is no death benefit payout or refund. The only exception is the ROP return on premiums term life insurance policy. If compared to Universal life, since term life offers no savings in cash value. It is not profitable at all if you outlive your term life.

Usually, people convert their term life to one of the permanent life insurance policies, later in life. If one can afford it, it’s always advisable to go for whole life or universal life insurance policies.

What holds people back from buying universal life insurance policies?

Due to the rising inflation, the payment of monthly premiums for any type of permanent life insurance policy is really difficult. Both whole life and universal life have a 5-15 times higher face value and death benefit payout. But it conversely affects the policyholder since you have to pay huge premiums compared to a term life policy.

At what age should you buy any life insurance policy?

Whether it is whole life, universal life, or term life insurance policy, the best age is when you’re younger. The premiums are less expensive and with permanent policies, you get to save a considerable amount of money in your cash value.

Ever thought about which is the better term, whole or universal life insurance policy?

In a nutshell, only two main things differentiate between term life, whole life, and universal life insurance policies. Their coverage time span, and the amount of monthly premiums. Assess your budget constraints, and go for the one suitable for you.