Term vs. Universal Life Insurance: Differences, Pros & Cons

The most obvious difference between these two policy types is how long coverage lasts. Term life insurance protects you for a specific period, usually 10, 20 or 30 years. Universal life insurance covers you for your entire lifetime, as long as you keep paying premiums.

Cost is another major difference. According to MoneyGeek analysis, a 40-year-old nonsmoker can get a term policy with a $500,000 death benefit for around $55 per month. Universal life with the same death benefit costs about $294 monthly.

Only permanent life insurance, such as universal, builds a cash value component. A portion of your premium goes into an account that earns interest and grows tax-deferred. You can borrow against it, make withdrawals or use it to pay premiums. Term policies don't build any equity.

Universal life also offers flexibility that term policies don't. You can adjust premium payments and death benefit amounts as your financial situation changes. Term life keeps things simple: fixed premium, fixed death benefit, set timeframe.

Term life works well for people who want straightforward, affordable coverage during their highest-need years. Universal life appeals to people who want lifetime coverage with built-in savings and flexibility.

Your coverage timeline, budget and financial goals determine whether term or universal life fits better.

Start by considering how long you need protection. If you're covering your family until the kids graduate college or the mortgage is paid, term handles that efficiently. If you want coverage that lasts until you die, universal life is the answer.

Budget matters because the premium difference is substantial. Universal life requires monitoring to keep your policy healthy. Term life is straightforward: pay your premium and you're covered. A common approach is buying affordable term coverage during high-need years, then converting or adding permanent coverage later.

When to Choose Term Life Insurance

Term life fits best when you have specific, temporary financial obligations you want covered. The lower cost lets you buy enough coverage to replace your income during critical years. Budget-conscious buyers get the most coverage per premium dollar with term life.

Young families often choose term coverage that lasts until their children become financially independent. Term coverage works well for covering specific debts, like matching the term length to your mortgage payoff date. If you expect sufficient savings by retirement, term coverage during your working years may be all you need.

When to Choose Universal Life Insurance

Universal life makes sense when you need coverage that lasts your entire lifetime or want to build cash value alongside your death benefit.

Estate planning often involves universal life because the death benefit passes to beneficiaries income tax-free. Wealthy individuals use it to provide liquidity for estate taxes or equalize inheritances among heirs.

Parents of children with special needs need coverage that won't expire. Business owners use universal life for key person insurance and buy-sell funding. If you've maxed out your 401(k) and IRA, the tax-deferred cash value growth offers another wealth-building option. The flexible premium structure suits people with variable income.

Term life delivers affordable, temporary coverage that works well for mortgages, raising children or replacing income during working years. Universal life provides lifelong financial protection with cash value accumulation and premium flexibility. The right option for you depends on coverage duration, budget and whether you value the cash value component.