Term vs Universal Life Insurance Comparison for Kids and Teens
This video does a term vs universal life insurance comparison in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about term life insurance and universal life insurance, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- Term vs Universal Life Insurance: How are they different
- How much would you pay for each, and do the premiums change over time
- What is the coverage period, and can someone outlive their insurance
- Other distinguishing features
- Term vs Universal Life Insurance: Which one is better
How are term life insurance and universal life insurance different?
Let’s first understand what each of them is.
Term life insurance is a type of life insurance that gives protection for a certain period of time – called the term. If the policy holder dies during the term of the policy, the beneficiaries receive the death benefit.
Term life insurance is the most affordable type of life insurance.
Universal life insurance is a type of permanent life insurance that lasts for someone’s entire life. In addition to the death benefit, universal life insurance also has a savings component, called cash value, where money grows on a tax-advantaged basis.
The main differences between these two types of life insurance lie in their cost, coverage period, and benefits.
How much would I pay for each, and do the premiums change over time?
Universal life insurance is significantly more expensive than term life insurance. It can cost many times more as it has a cash value, unlike term life insurance.
The premium for term life insurance stays the same for a given term. However, if insurance is needed after the term ends, the premium will be higher in the new term life insurance policy.
But in universal life insurance, the premium goes up over time.
What is the coverage period, and can someone outlive their insurance?
Universal life insurance lasts for the policy holder’s entire life, and it’s impossible to outlive universal life insurance as long as the premiums are paid.
However, it is possible to outlive term life insurance if the policy holder is alive at the end of the term.
Are there any other distinguishing features?
Term life insurance offers no frills. Whereas universal life insurance sets aside a part of the premium as the policy’s cash value.
This cash value can be accessed by the policyholder during their lifetime as withdrawals or loans, as needed.
Any withdrawals or unpaid loans reduce the death benefit. However, the cash value can also be used to pay premiums without impacting the death benefit.
Also, unlike term life insurance, universal life insurance allows the policyholder to change both the premium and the death benefit if needed.
Term vs Universal Life Insurance: Which is better? Which is right for you?
Term life insurance is the purest form of life insurance. It only has the death benefit, and no add-ons – making it the least expensive form of life insurance.
A key selling point used to justify the high premiums of universal life insurance is the cash value, but the beneficiaries do not receive the cash value – it goes back to the insurance company when the policyholder dies!
Therefore, the best option for most people is to buy term life insurance for a duration chosen after careful consideration of their dependents’ financial situation.
One popular strategy is “buy term and invest the difference”, where you buy term life insurance instead of universal life insurance, and invest the money saved in premiums.
This way, not only will you pay less for the insurance, but you will also be able to invest on your terms to maximize returns.