Term Vs Universal Life Insurance – What’s the Difference?

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It is a general notion among people that all life insurance policies are the same; and they offer the same benefits. But, this is not true, each policy is unique and has different features. In this write-up let’s look at the difference between Term Insurance and Universal Life Insurance.

If you are looking to buy a life insurance policy, you would find that there are several options available in the market. Among the different types available, Term Insurance and Universal Life Insurance are the most popular ones. While the Term insurance, as the name itself suggests, provides coverage only for a certain limited term/period, the universal life insurance policy, provides protection as long as you continue to pay your premium.

So, how do you decide, which one is better? To make your purchase decision, you must first know these insurance policies are and what benefits do they offer.

What is Term Life Insurance?

A term insurance policy, which is also commonly referred as the pure protection policy is one of the simplest life insurance products. It is also known for its affordability; it has the lowest premium among other types of life insurance policies. In term insurance, you pay a fixed premium for a specific period (which is decided at the time of purchasing the policy). In the event of your unfortunate demise before the end of the policy term, the insurer will pay the death benefit to the nominee. But, if you outlive the policy period, there is no pay out.

Important things to know about term insurance

  • Term insurance policy comes with a coverage period ranging from 10 years to 30 years; you can choose the policy tenure as per your needs. Once the policy term ends, you can either extend the term or you can convert it into a permanent policy.
  • The premium for a term insurance policy is much affordable than other types of policies. This is mainly because the insurer has a lower risk of paying the death benefit. But, with universal policies or permanent policies, the insurer must pay eventually.

What is Universal Life Insurance?

Universal life insurance policy, which is also commonly referred as a permanent policy provides lifelong protection provided you continue to pay the premium. Just like the term insurance policy, universal life policy too provides a death benefit to the nominee, which is totally exempted from tax.

A significant difference between term insurance and universal insurance is that the latter also has an investment component. A part of the premium amount is invested in different assets to give the policyholders a cash value.

Important things to know about universal life insurance

Unlike a term insurance policy, if you have a universal life insurance, you can apply for a loan. You can borrow from the accumulated cash value to pay for emergency expenses.

It is inevitable that your life changes over the years, so universal policy gives you the flexibility to adjust your premium amount based on your current needs. For instance, if you were unmarried at the time of purchasing policy, you may have opted for a limited benefit for a limited premium. But, once you get married and have children, as your responsibility increases, you can increase the premium to extend the cover to your family members.

Since a portion of the premium is invested in different financial products, you get an interest on the cash value. The interest rate is determined by the insurance company and it hinges on the performance of the investment.

So, the question is which insurance should you buy?

Well, the decision rests entirely on you and your needs. You can consider buying a term insurance policy, if:

  • You cannot afford to pay high premium
  • You want insurance coverage only for a certain period
  • You are involved in a profession that does not provide you stable income
  • You want a simple protection policy

You can consider purchasing a universal policy, if:

  • You are looking for a policy that allows flexible premium
  • You look at an insurance policy as an investment opportunity
  • You want to protect your assets and leave a solid inheritance for your children

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