One of most common questions clients ask us is: “What is the difference between term and universal life insurance?”
This article will help you weigh the pros and cons of Term vs. Universal Life Insurance coverage, and introduce a popular hybrid between the two. Let’s get started!
Quick Article Guide:
If you listen to Suze Orman, Dave Ramsey, Bob Brinker or any other well-known financial adviser, they’ll tell you that term life insurance is the only way to go…but why is that?
Term Life Insurance is by far the most popular type of life insurance because it’s where you get the most “bang for your buck”. You’re strictly paying for insurance for the period of time you need it – when a death and resulting loss of income would cause your loved ones a severe financial hardship.
Universal Life Insurance, on the other hand, combines life insurance with an investment vehicle. That’s the part creating “cash value”.
As an insurance agent, I can tell you this is the part which creates revenue for us. As a consumer, I can also tell you I would never buy one of these policies as an investment due to the high money management costs and contractual language. In short, these policies a “cash cow” for the insurer, but there not always the best choice for the consumer.
I am not a financial adviser, but will tell you to do your due diligence before purchasing any type of universal life insurance coverage. Many projections and charts in these policies show a “non-guaranteed” return that’s very attractive, but rarely achieved. “Non-guaranteed” is what it says, but these returns are based on aggressive returns which may or may not be realized by the insurer’s investment team. They are no better than what you can find through mutual funds, and they generally charge much higher management fees.
Through tax advantages, there are times when a Universal Life policy is an appropriate part of an overall financial plan, typically for a high net worth individual. Confer with a tax professional. Again, do your due diligence…read and understand the contact. We recommend doing so with a CPA familiar with these products…someone not vested in selling you the product.
Once your life insurance application is approved, you typically have at least 30 days to execute (assuming your health doesn’t change in the interim). Tip: also ask about a “free look” period where you can cancel with a full refund. With standard life insurance, this period is 30 days. With a UL Policy, “Surrender Fees” on the investment side could kick in immediately.
Say you decide to purchase a Universal Life policy. Here’s what kind of fees you can expect:
- Management Fees: We’ve reviewed policies with upfront “loads” of 3-6%, “contract fees” for $75-$120, and annual administration expense fees for .3-1.5%
- Surrender Fees: This is the fee imposed should you cancel a UL policy. We’ve seen these fees at $250, $500, $750 and well above. Also look at the “Surrender Value”, which is the amount Cyou receive back. It may be a percentage for flat amount.
- Loan Fee: The cost of borrowing against your policy. As with borrowing from a financial institution, there can be loan origination fees along with the interest rate, which is generally higher than borrowing through an independent source. If the loan is not repaid, it generally results in a reduced death benefit. I’ve seen an instance where the policy holder borrowed $10,000 from his policy and his family received $150,000 less than they anticipated, forcing his disabled wife to sell their home….the reason “Dad” bought life insurance.
- Cost of Dying: Whenever buying a cash accrual policy, be sure to get a clear understanding what happens to “cash reserves” if you die. Generally the insurance company pays the death benefit, but retains the cash reserves!
We frequently receive calls from clients who’ve reached their 50’s and 60’s and learned they must put more money into the policy to keep it going. They purchased it many years earlier and didn’t really pay attention to what was happening on the cash side of the policy.
The “cash value” often depletes at an accelerated rate as the cost of insurance increased with age and the insurer’s investment returns didn’t reach the “non-guaranteed” expectations.
If you have a UL policy and haven’t reviewed your statements lately, we highly recommend you do so. If your cash value balance is reducing in a bull market, you may have decisions to make.
If you’ve determined you want to get out of your UL policy, there’s a checklist to review:
- What is your current need for life insurance? Do you just need for a few years to bridge to retirement, until your family home is paid off, or getting the kids through college? Or is it a long term or “permanent” need, such as estate protection or part of a strategy to allow you to take a full pension benefit while still protecting your spouse? Perhaps you’re now “self-insured” and really don’t life insurance at all.
- Will the amount of life insurance change over time? Many of our clients stagger 2 or 3 term policies of varying term length to reduce their coverage and expense over time also known as layering coverage. We’re also aware of term life carriers which have a guaranteed one-time option to reduce the death benefit. These are good strategies for providing future flexibility and cost management.
- Are you still insurable? Before making changes to existing life insurance, it’s wise to first re-qualify. JRC agents have many years of underwriting experience, and provide very accurate pre-qualified rates and options right over the phone. We can provide you written estimates for ten or more A-rated carriers pricing best for your age and risk factors. If worth pursuing, we’ll coordinate a free in-home health screening exam. Allow 6-8 weeks for the process. Once approved, you can make your decision. There’s no obligation if your rates don’t come back where anticipated or you change your mind about replacing your policy.
The amount of term life insurance available to you varies by company, but is primarily determined by age and income. Whereas my Farmer’s Agent told me they don’t sell term life to men over 50, there are A-rated companies selling $100,000 or more in term life coverage for men over age 80! Our article, “How Much Should I Expect to Pay for Life Insurance?” provides sample rates at various “start ages”.
For clients seeking lifetime coverage, there’s been a real shift in recent years from Whole Life insurance (Universal Life, Variable Universal Life, etc.) to Guaranteed Universal Life.
“GUL” policies function like a term policy, with low fixed rates, but instead of guaranteeing rates for a specific number of years (the “Term”) they guaranteed to specific ages…
90, 95, 100, even 121!
Some of these policies including an investment option….you can decline that part without it affecting your life insurance cost.
To learn more about Guaranteed Universal Life Insurance, click here, or feel free to get a quote on our site by selecting “coverage until age 90” or “coverage until age 100” etc.
Better yet, give us a call. We pride ourselves on providing accurate quotes and expert advice…all at no cost to you. JRC agents are fully licensed agents, independent of the insurance carriers.
Should you decide to apply for coverage, we’ll take care of the details and with you every step of the say. We can be reached by calling: 855-902-6494.