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A Question of Life: To Term or Not to Term?
By Dan Weedin, CIC
I get some of my best ideas for articles while sitting back in a comfortable chair, feet up, with my mouth wide open — at my dentist’s office. Really. At my last visit, the dental hygienist wanted my opinion on the merits of term life insurance versus universal life, because she and her husband had just purchased a house and were weighing life insurance options. Of course, she asked while my mouth was occupied, so I promised her this article!
How to choose between term and universal life insurance is actually a question I’m asked frequently. Of course, there is no easy answer because everyone’s circumstances are different. The method that works for me is a 30-year guaranteed term policy paired with a consistent investing strategy. But that might not be right for you. The best way I can answer the question is to show you how to compare these two common types of life insurance, so that you can decide for yourself.
Let’s look at term insurance first. Guaranteed term insurance is set to different lengths of time. Think of it as a lease. You can get a policy with a 5-, 10-, 15-, 20-, or 30-year term (or lease). During that term, your premium will remain the same. Therefore, be careful that you choose a term long enough to fit your entire need, because when the term expires, the premium will go up substantially to reflect your increased age. As you might imagine, the longer the initial term, the more expensive the annual premium will be. That being said, the rates on a 30-year term are so inexpensive right now, I recommend that you take a hard look at them if your goal is to protect your mortgage and your family during your highest income-producing years. But if you are purchasing insurance to provide coverage over a shorter period of time — maybe for protection while a loan or line of credit is outstanding — you can go with the shorter and more economical option.
In addition to the policy with a guaranteed premium over a fixed term, there is also the annual renewable term (ART). These policies are one-year “leases” that offer more of a premium bargain than their counterparts do. But beware…the rent goes up every year. If you plan to purchase term insurance for the long run, this is not the way to go, because you will spend more money over a 10- or 20-year period with an ART. If you are looking at a very short time frame, however, and perhaps plan to convert to universal insurance, consider this option. Otherwise, save your money by getting a guaranteed premium.
Now let’s look at universal life insurance (also referred to as permanent). You can think of universal life as a mortgage instead of a lease. The premium is much higher than for term insurance, but it will never go up. Plus, this coverage has an equity component that earns interest. In fact, you can use the cash value (your equity) to pay for the insurance portion later in life. Or you can pull the cash value out and use it for whatever you want. Sounds good, huh? Maybe, but there are some drawbacks. First, you had better be in it for the long haul, because as I say, the premium is substantially higher. What’s more, the interest is tied to how the economy is doing, but you probably can find better investment vehicles if that’s your goal. And if you die, your beneficiary doesn’t get the scheduled death benefit plus the cash value. You can use that cash value only while you’re alive and, yes, pulling out the cash value to use for other purposes decreases the death benefit.
So the principal advantages of universal life are:
- Knowing that your premium will remain constant;
- Knowing that you will have life insurance for, well, life; and
- Knowing that if you become uninsurable at some point (for instance, because of cancer, multiple sclerosis, or diabetes), your premium will not change and your insurance will remain in force as long as you keep paying the premium.
(I know people who were thankful they had opted for universal life when they were later struck by illness.)
In contrast, the principal advantages of term life are:
- Knowing that your premium will remain constant over the policy term; and
- Being able to purchase more insurance coverage per dollar spent because the policy has no cash value.
(But remember, if you need to renew after the term expires, the premium will increase substantially, so select the term carefully.)
I hope I didn’t add to your confusion. I urge you to sit down and really figure out why you want life insurance and how long you want to have it. After you have answered these questions, sit down with a competent life insurance professional to discuss your options. But you might want to act soon, because unlike other types of insurance, premiums are going down in response to our increasing longevity.
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