What is the difference between term and universal life insurance?

Your life is ever changing thing. Life Insurance offers several options to help financially protect your loved ones if you pass away unexpectedly. You might get coverage between $50,000 and $10,000,000. There are lots of insurance plans that are flexible, allowing you to choose the insurance coverage that’s right for you.

The benefits of life insurance

The main benefit of life insurance for you is “peace of mind”, in knowing that your death will not result in financial hardship for your loved ones.

Should you pass away, your beneficiaries would receive a lump sum, tax-free payment to help them replace lost income, maintain their lifestyle, pay off debts or cover education costs.

Even though the owner and the insured are often the same person, there is a difference between the insured and the policy owner. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe’s life, she is the owner and he is the insured. The policy owner is the guarantor and he will be the person to pay for the policy. Most insurance companies allow the payer and owner to be different.

Types of Life Insurance

Life insurance may be divided into two basic types:

• permanent life insurance, such as whole life insurance and universal life insurance, and
• temporary life insurance, such as term life insurance.

Premiums vary, depending upon the type and amount of insurance you wish to purchase, and can be paid monthly, quarterly, every six months or annually.

Term Life Insurance in Ontario

Term life insurance provides coverage for a specified term. The “term” is typically 10, 20 years or to age 65 or 75. Generally, term life insurance offers the most coverage at the lowest monthly payments for a set period of time. Premiums for term life insurance plans are guaranteed not to increase for the initial 10 or 20 year term of the policy. After this period the policy can be renewed (often, automatically) up to age 80. A new premium is calculated based on age at the renewal time and usually rise upon renewal.

Term life insurance can’t be cashed out because these policies do not accumulate cash value during the limited time they provide coverage.

Universal life insurance

If you seek lifetime insurance coverage and tax-advantaged investing with long-term growth potential, consider universal life insurance. Lots of options and flexibility make universal life insurance a good choice if you want to build towards your future while helping to ensure that your loved ones are well-protected. Whole and universal life insurance differ from term insurance in that they last for your whole life. With this extended period, premiums are considerably higher than with term insurance, but you’ll be able to lock in a lower premium rate.

The main difference between term and universal life insurance

Term life insurance pays a lump-sum if the insured person dies within that term. The term life policy does not accumulate cash value. Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else.

In other words: if you don’t die during the life insurance term, all your payments will be lost, and you won’t get a penny back.

Main advantage of universal life insurance is that you can combine the protection of life insurance with the growth potential of tax-advantaged investing.

You might convert term life insurance into permanent or universal life insurance

Some term insurance policies have an option that enables the policyholder to convert them into a form of permanent life insurance.

Question to ask yourself while considering life insurance

The first step while choosing an appropriate life insurance plan is to find the balance between the coverage you need and the amount of a regular payment you can afford. And when you come out with the number, for instance $50 per month, ask yourself this question:

Would I quit my job if my monthly salary was cut by $50?