For most, life insurance needs depend on income and life stages. Term life insurance policies are designed for those seeking coverage for a fixed period, while universal life insurance policies offer more permanence and increased financial options at a higher price. The sole breadwinner of a young family may choose a term life policy for affordable protection, then switch to a universal policy once his children are grown and his financial plan changes.
As its name suggests, term life insurance policies run for a set number of years and pay a death benefit if the policyholder dies during that span. There’s no investment component or asset-building element to a term life policy -- it's strictly there to provide for the heirs of the deceased over the designated period. Because the premiums are relatively inexpensive for young policyholders, it can be the only way for some to afford the coverage recommended for those with young families.
Universal life insurance stays in place as long as the premiums are paid. In addition to a death benefit, such policies also allow the policyholder to build equity that can be accessed via a loan or withdrawal. Those actions will reduce the final value of the policy if they're not paid back. The investment opportunities combined with the death benefit can make this attractive for those better able to afford the higher premiums.
Converting Term to Universal
Many insurance providers allow policyholders to convert term life policies into whole life policies. It's an option people tend to take when they age. A benefit to this approach is it usually doesn’t require another medical exam. Your health rating should remain what it was when you bought the term life policy, though the rates will reflect your age at the time of the conversion. However, some term life insurance policies only let you convert until a specific deadline, such as 10 years into a 20-year term life policy. The conversion range options depend on the company and its portfolio. It’s something to ask about when you choose a carrier. Conversions from universal life to term life policies are far more rare, and few companies offer them.
Group vs. Individual
Some employers offer employees life insurance via a group plan. The employee must answer some basic medical questions as part of the application process. However, a group plan generally does not require a medical exam or the detailed list of questions needed to qualify for an individual policy. This can benefit those who have minor medical conditions that would raise the rates on an individual policy. However, because that risk is factored into the premium cost, some may find that an individual policy is cheaper. Group rates also change periodically while individual rates for a term life policy can be locked in for an extended period. Moreover, when you leave the company, you’ll have to convert the policy to an individual one. That can be more expensive than one you can find on your own.
- John Hancock: Term Life Insurance
- John Hancock: Universal Life Insurance
- State Farm: Converting Term Life to Whole Life Insurance
- Bankrate: When to Terminate a Term Life Policy
- Insurance.com: Term Life Insurance -- The Option 99% of Policyholders Ignore
- Kiplinger: Group Versus Individual Life Insurance Policies
- Bankrate: Can I Undo a Term Life Insurance Conversion?