Term Life Insurance Versus Universal?
Posted October 7, 2009 – 5:23 pm in: term life insuranceHi
What is the recommendation, term or universal?
I have universal now, in my 40’s, paying the lowest premium possible and I am a standard type for health.
Thanks
Tony
7 Comments
Term is usually the better bet from a purely economic standpoint, but if you have trouble saving, universal can play a role — but for it to work, you need to be very motivated to keep up those premiums.
The basic idea is that universal is sort of like 2 things rolled into one — it is life insurance, so it pays some amount of money when you die. But it is also has a savings component, so some of the premiums you are paying in are essentially going there, and being invested by the insurance company.
Term insurance is just life insurance — it just pays some amount of money when you die.
So if you are a good saver, you are typically better off purchasing term insurance, and saving the rest yourself. If you invest those savings in a regular mutual fund or index fund, then you will very likely get a better return (earn more money) on those savings than you would through the insurance company. (They have to make their money somehow, and part of where they make it is on charging “fees”.)
If you are a bad saver, then sometimes universal life can help you save — it turns saving into a bill that perhaps you more automatically pay. That’s fine, even though it costs you something, if it means you’ll really save. The problem, though, is that if you fall behind on these payments you suddenly may not have life insurance. So if you were following the plan of term insurance plus saving, you could always not save for a month or two if you had an emergency, but continue to pay your insurance. If you have universal life, then if you don’t make those payments, you don’t have life insurance. The term+saving on your own technique gives you more flexibility.
It is often said that you should have universal coverage if you still want life insurance coverage when you are very old. It is true that term insurance does not last forever, but if you are saving appropriately outside of your term life insurance, then you will no longer need life insurance coverage when you are quite old, because you will have saved enough already.
So figure out how much life insurance you need (www.vilkri.com can help — it is currently free if you ask for beta testing access), and purchase that much in term life insurance. Ask your agent how much universal life insurance for the same amount of coverage would cost in premiums. Then save the difference. If you stick to it, you will come out ahead of buying universal coverage.
What you really need to consider is how long you need the insurance for. If you only need it for the next 10, 20 or 30 years (until your mortgage is paid off, your kids are out of college, whatever your reason) then you’d probably save some money by switching to an appropriate term policy. Once the term is up, it’s likely that you’d lose the insurance because it would either not renew or it would renew but the premiums would be unaffordable.
If you want the insurance to last for the rest of your life, then you’d be better off keeping the Universal life. However, you mentioned that you’re paying the lowest possible premium…if you really want the insurance to last the rest of your life, you may need to increase the amount of premium you’re paying. Talk to your agent and they should be able to give you proposals that will tell you how long your policy will last at the minimum premium and how much you’d have to pay to ensure that your policy will last your whole life.
Life insurance should not be used as an “investment” unless all other tax-defereed investment outlets have been exhausted. Universal life typically doesn’t grow much in the cash value department unless you pay extra money every month anyway.
Bottom line…do you want the insurance to last the rest of your life, or just a set term of time?
The bottom line: compare the rates. If you are looking at a policy with a cash value, look at how fast it builds the cash value compared to how much more expensive it is.
Almost always, the cheapest insurance is term insurance, and if you save/invest the difference in the premiums, you’ll build cash value much faster than you would in any insurance plan.
What’s the GOAL of the insurance?
If the goal is SAVINGS/INVESTMENT, then life insurance is a crappy tool. If it’s, payout if/when you die, term is much cheaper than UL.
First set the GOAL, then select the products.
if you can afford the universal keep it
if you need the money and can’t afford your universal drop it get the cash value and get a 10 or 20 yr term policy
and get it from state farm
Insurance has nothing to do with the cash value. The question is how long do you need coverage. If you want it until you’re 100 yrs old get a universal life policy.
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