Universal Life vs. Term Life Insurance

In this article...
  • Compare universal life vs. term life insurance. Discover the features, benefits and drawbacks of both types of policies so you can get the right coverage.

Life insurance companies offer many types of policies. Having a wealth of options ensures you can get the best coverage for your needs, but figuring out which policy is ideal can be daunting. By comparing term life vs. universal life insurance side by side, you can better determine your needs and make an informed buying decision.

Comparing Universal Life vs. Term Life Insurance

 You can compare universal versus term life insurance based on many criteria.

Length of Coverage

Term life lasts for a limited time called the term. Common terms include 5, 10, 15, 20 and 30 years. At the end of the term, the policy expires. Universal life is permanent insurance that remains in place until you die.

Premium Size

Term life generally has lower premium payments than universal life.

Death Benefit

With term life, your death benefit is locked in. Some types of universal life insurance let you increase and decrease the death benefit.

Cash Value

With universal life insurance, a portion of premiums paid goes into an account that builds up to give your policy cash value over time. Some types of universal life insurance let you select how the money is invested, and all forms pay at least a small amount of interest on the cash value. Term life doesn't have a cash value.


You can usually obtain a policy loan against universal life insurance. Once the loan is in place, you don't ever need to make a payment. When you die, the outstanding loan balance is deducted from your death benefit. Term life insurance has no cash value, so you can't use it as loan collateral.


With term life insurance, you don't expose yourself to much risk. Provided the insurance company remains solvent, your beneficiaries will receive the promised death benefit. Some forms of universal life such as variable universal life (VUL) carry a risk of financial loss. While the death benefit is usually protected, you could lose the cash value of your account depending on how linked investments perform.

Is Universal Life the Same as Term Life?

No, universal life and term life are not the same due to the differences outlined above. However, they do have a few similarities. Both:

  • Pay a tax-free death benefit when you die
  • Require you to pay monthly premiums
  • Can include optional riders that enhance or modify coverage
  • May require a health examination during the underwriting process
  • Have a short initial free look period during which time you can cancel and get your premiums back

Can You Cash Out a Universal Life Insurance Policy?

Yes, you can cash out a universal life insurance policy while you're alive, but you may not receive as much money as you think. During the first years of a policy, most of the premium payments go to paying commissions and administrative fees, so cash value grows slowly.

If you surrender your policy, you're unlikely to receive enough to offset what you paid in premiums or you may not get any money back at all. Even after your policy has significant cash value, you'll pay a surrender fee to the insurance company when you cash out.

Standard term life insurance policies don't have a cash value. If you terminate your policy early, you normally won't get any money back.

Return of premium life insurance could let you get back what you paid into your term life policy. With this type of insurance, you pay more for your monthly premium in exchange for a promise that you'll receive your premiums back if you outlive your policy. You don't earn interest on the premiums, and you normally must keep the policy in place for the full term to get the refund. Often, return of premium is available as a rider on standard term life.

Which Is Better: Universal Life or Term Life?

For most people, term life insurance is the best option because it lets you pay less to pass a death benefit on to your loved ones. Universal life insurance may be a better option if:

  • You need the tax advantages of passing a large death benefit onto your loved ones
  • You want to force yourself to save money and need life insurance
  • You prefer to only buy insurance once and want coverage that will last your entire life
  • You have a dependent who will need care throughout their lives, such as a disabled child
  • You are at high risk of developing a health condition in the future and want to get permanent coverage while you're young

If you're still unsure which type is right, consider convertible term life. This type of policy starts off as term but gives you the ability to convert to permanent insurance like universal life. Premium payments for this type of term life are usually higher, and you only have a limited window of time to complete a conversion. On the upside, you normally won't have to undergo a medical exam to convert.

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