Term Vs. Universal Life Insurance

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Term Vs. Universal Life Insurance
There are many types of life insurance policies in Canada, but they all generally follow a similar structural format. The two fundamental types are term and permanent life insurance. The main difference between them is the duration of coverage. This is related to your future, so naturally, you need to do ample research before selecting one. This article will mainly talk about term vs. universal life insurance in Canada.

There are many types of life insurance policies in Canada but they all generally follow a similar structural format. The two fundamental types are term and permanent life insurance. The main difference between them is the duration of coverage. These things are related to your future, so naturally, you need to do ample research before selecting one. This article will talk about Term vs. Universal life insurance in Canada.

In simple words, Universal Life Insurance is a flexible permanent life insurance. It covers the policyholder for their lifetime. The Term insurance only covers the policyholder for a fixed duration. They do not get the death benefits if they fail to die before that duration ends.

There are many intricate details to these policies. No life insurance policy suits everyone. So it is necessary to check the pros and cons of each type. Many people also wonder whether they can get their investment back at the end of the duration of Term insurance.

The Fundamental Difference Between Term & Universal Life Insurance

The term and universal life policies are the two significant life insurance policies. They are both flexible policies with a wide range of coverage options. The fundamental difference between them lies in how long they cover your life. What is the difference between term and universal life insurance? Before I go into more detailed explanations, I deem it necessary to clarify the definition of these two types:

1. Term Life Insurance

Term life is the most common and affordable life insurance policy. It offers protection for a fixed time.

You can only claim the insurance if you face the conditions listed within that set time frame. The conditions could include protection against dismemberment, workplace accident, and accidental death.

However, a term policy will only give you fixed insurance proceeds in such cases. The amount does not grow with the duration of the term.

Term insurance will expire after the contract ends. It’s usually very affordable since you don’t need to pay too much premium. You could also extend the insurance after a term ends. Most insurance companies offer that service for a higher rate. There’s also a more sensible option to turn it into a permanent policy.

You can usually get a cheaper rate if you are younger. The rate increases in proportion to your age since your risk of dying also increases.

2. Universal Life Insurance

Universal life insurance is a permanent insurance policy with an investment feature. You could think of it as a term policy that lacks an expiry date and has growth potential. It’s an all-around upgrade over the term policy. One that also has some tax-deferral features.

The total insurance proceeds you’ll get will keep increasing with time. But the initial premium rate can differ based on your age. That’s why it is generally better to get insurance early in life. That keeps the premium rate at a manageable level.

Structure Of Term Insurance

Term insurance policies generally come in packages of 10, 20 or 30 years. You will also see 15, 25 and so on. In most cases, it is a rounded number, and there’s an upper limit. Different companies might have various ceilings, but you could usually get up to 60 years. It’s generally within that ballpark. However, extremely few people would ever get a term that long. It’s more expensive, and you earn too little benefit for making it worth your while. Most people would instead get a permanent policy with that money. There’s also a certain amount of flexibility to the term policies. For example, some companies will let you decide the term. That way, you don’t need to pick a rounded-out number. It’s usually called the “pick-a-term” deal. Besides the unusually cheaper rates and the fixed timeframe, the term policy offers decent financial protection. It typically covers your outstanding debts, mortgages, and even the expenses of your child’s education in some instances. The specific details will vary depending on your service provider.

Structure Of Universal Life Insurance

The universal life insurance policy functions differently than term policies regarding how it uses your premium. In the case of term policies, the premium payment is a fixed number. One that you need to pay for an equally fixed benefit. On the other hand, the universal policy divides the premium into two distinctive parts. One part is the insurance cost, and the other is the savings fund. The savings fund or cash value is the part that adds the growth feature to the policy. The premium division is separated into two parts. One goes for the cost of insurance, and the other adds to the savings fund. But the ratio changes based on your age. For a younger person, the cost of insurance would be lower, and a more significant part will go towards the cash value. The cost of insurance covers many aspects, such as enforcement costs, mortality charges, and other administrative costs.

Advantages & Disadvantages Of Term Insurance

Insurance policies are situational. You can get more value from them if you pick the right ones at the correct times of your life.

Here are some of the benefits of term policy:

1. Affordable Insurance Cost

Term insurance is far more affordable than universal insurance because it only covers you for a set period. The cost is just a fraction of the permanent insurance, but it still offers a good safety net.

From a cynical perspective, you will lose money if you don’t die within that term. And to get an extension on that term costs even more. But such policies generally provide a lot of valuable riders to the policyholder.

2. Tax Benefits

The term policies are tax-deductible. That means you have to count the taxes while paying the insurance cost. But the payout benefits are exempted from the tax. It is a good choice if you want to leave your family members with less hassle to deal with. The term policy is also the simplest of all insurance policies.

3. Higher Flexibility

Along with being more affordable, the term policy offers more flexibility too. Most companies will let you select the term, and different times provide different benefits. Usually around 20-30 years, long-term ones cover short-term debts and current expenses. On top of that, you can get a rider for your children’s education. But you might not need those things all the time. In which case, you may change your policy parameter midway to cater to your needs. That’s why the term insurance has more value from a strategic point of view.

Advantages & Disadvantages Of Universal Insurance

Universal life insurance has many benefits, making it a better choice than term insurance policies in most cases.

Here are some of the pros of this policy:

1. Versatile Payment Options

One of the most significant benefits is payment flexibility. Most other permanent life insurance policies have a rigid payment system. You would generally need to pay on a fixed date each month. The premium amount is also set in stone. That means you can not change your plans later in life. The universal life insurance policy lets the policyholder decide the time and amount they want to pay. Naturally, a minimum insurance cost threshold would exist. But the policyholder can choose to pay more than the minimum amount in some cases and pay less in some cases. As long as they can meet the minimum total, everything is fair game. This quality makes universal life insurance the best option for people with variable incomes.

2. Flexible Death Benefit

Your death benefit is a fixed amount in most permanent life insurance policies. Generally speaking, you won’t have the power to change it. It has become a very restrictive option since people’s goals and expectations change throughout their lives. Universal life insurance, however, lets people adjust the coverage. Depending on your needs, you could either reduce the total coverage range or increase it. Reducing the death benefit is easy, and you can directly add that portion to the cash value. But you would need to go through a health checkup before increasing the death benefit for obvious reasons.

3. Affordable

Permanent life insurance policies cost more than term policies. That is due to the higher risk of death benefits. But the permanent policies don’t have a homogenous price range either. There is another permanent policy called whole life insurance. 

So what’s cheaper – Term or Whole life? And how do they compare in terms of benefits?

Universal life insurance is a low-risk investment. It has a minimal policy cost compared to other permanent policies such as the whole life policy. Since it costs less, it also gives fewer guarantees. On average, the death benefit of a universal life insurance policy is less than.

4. Guaranteed cash value growth

One of the most significant benefits of universal life insurance is the guaranteed interest increase. As you can tell by now, this policy gives a lot of freedom to the policyholder. They can take on careful management and fund transfers. However, no matter what they do, the interest rate of the cash value will keep on growing. There’s a fixed threshold, and the cash value interest never drops below that range. There are some restrictions too. For example, the policyholder can’t stop making payments for too long. They also can’t take out too much from the total cash value.

How To Tell Which One Suits You Better

So, what is better? Term or universal life insurance? 

Which one should you choose? That honestly depends on your situation. Both of these are acceptable options. But they perform better under certain conditions.

Term coverage is a good option for professional fields. It is one of the most common ones many companies offer to their employees. The term limit suits the policyholder just fine, and the company can revoke it without paying too much if the employee leaves them.

Another reason for its popularity in the professional field is its coverage. Despite being a relatively cheap option, the term policy gives excellent disaster coverage.

At the same time, the flexibility of this policy is good for new families. New families do not have too much financial capital to invest in these things. So a cheap short-term plan suits them fine. They can quickly get through the initial stage and pay for a more premium option when they are more financially stable.

Universal insurance is a better option for people who have more capital to pay the premiums. It has a guaranteed interest increase, which is a reasonably safe investment.

At the same time, it also has flexible payment features. So you can easily change your plans according to your situation. But generally speaking, universal insurance is the best option for people with fluctuating income ranges.

Can You Get Your Premiums Back In Term Insurance?

You learned how the Term policy and universal insurance work. So you probably noticed that the term policy looks like a losing deal on paper. It’s where you get no tangible benefit for spending the money for the duration of your term. Unless you go through those situations, the insurance company naturally won’t pay you any accident or death coverage payments. So, you’re probably wondering if you can do anything about it or not. You could technically work around this by adding a rider to your policy. The name of the rider is “return-of-premium.” Adding it would cost you quite a lot of extra money. but it saves you from wasting your money. And even if you do end up dying within the term, your beneficiary will get more payments. However, you might not find this option in all insurance companies. So do your research beforehand.

Conclusion

I believe that should answer all your queries about those two types of insurance policies. Both of them are flexible and have strong points and some cons. Regardless, It should also give you more insight into Term vs. Universal life insurance in Canada.
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