Choosing the right type of life insurance for you and your family can be one of the most confusing but important decisions you make. If you don't have a policy, or are stuck with an inadequate policy, it could mean a heavy financial burden on your loved ones in the case of your death. By learning more about the two main types of life insurance, term and universal, you can choose what's best for you and avoid painful, costly mistakes.
Who Needs Insurance?
Life insurance is a good idea in many situations, but not all. For example, if you're a single individual with no dependents and enough savings to cover funeral costs, you may not need insurance. If you have people counting on you for college tuition, a mortgage, debt payment or general income, then some form of life insurance isn't just a luxury, it's a must.
Term Life Insurance
Term life insurance is the most basic type of insurance and provides protection for financial hardship due to an accidental death or debilitating injury over a period of time. The premium rates for a term life policy are dependent upon the policy you choose. Policies can usually be purchased for periods of 10, 15, 20, 25 and 30 years, and they may be renewable.
Term Life: Pros
Term life is the cheapest form of life insurance, especially for young people when death risks are lower. These policies are flexible, allowing you to choose a period that's just long enough to provide coverage to get your children through college or pay off a mortgage. The face amount (death benefit) is also guaranteed to remain at the same level for the number of years you choose. Some companies even provide a return of premium (ROP) option, which enables you to receive 100 percent of the premiums you've paid into the plan at the end of your term period. With an ROP, you may also be able to receive a partial return of your premium for policies canceled before the end of the term.
Term Life: Cons
The price of your policy will rise as your age increases, and if you want to renew the policy after the initial term, the fees tacked on due to age or health concerns may be prohibitive. These policies don't build up any equity (in most cases), meaning you wouldn't receive any cash back.
Universal Life Insurance
A universal life insurance policy, also referred to as a "cash value" policy, is generally used by individuals whose financial planning goals extend far into the future. Universal life insurance plans offer long-term guarantees such as 20, 30, 40 years or even up to age 120.
Universal Life: Pros
Universal plans provide the best of both worlds, by offering a guaranteed contract the same as with term insurance (but with longer periods of coverage) and the chance to build up tax-deferred equity. There are even variations, called Index UL or Variable UL, that offer cash value returns tied to the S&P 500 or a variety of mutual funds. The face value amount and premium are both guaranteed to remain level for the period of time you choose, and in some cases, the rates may actually drop or disappear completely as the policyholder ages.
Universal Life: Cons
Universal life plans cost more, and you will probably have to hold the policy for at least 15 years to see any returns, with early termination subject to penalties. It can also be argued that a consumer may earn a better rate of return by simply investing the money instead in stocks, mutual funds or other strategies and with fewer strings attached.
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