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Term Life vs. Universal Life

November 14, 2008

Do you know the difference between term life and universal life?  One is temporary and one is permanent. This is an important distinction and should be understood.  Term life is only for either 5,10,15,20,25,or 30 years usually, and it is basically renting protection at a low cost. At the end of the rental period, the company raises the premium tremendously, and really hopes you don’t pay it, and your policy lapses and they are off the hook while keeping all the premiums you have paid, without having to pay the death benefit. This is why if you have term life you should have it rewritten before the end of the term period, and give yourself a new lease for a longer term. The premium will be higher since you are older, but far less than the end of term premium.  Of course your health is an issue, and you try to get a new policy while you are healthy and can pass a  exam.

Universal Life is permanent protection, and its like owning a home which builds equity as long as you own the policy.  The premiums are higher, but don’t change for the rest of your life, and you can borrow the cash build -up periodically at a low interest rate with no obligation to repay until you die.  The cash can also be used to pay your premiums if needed. Also the cash accumulates on a tax deferred basis, so any profit you make over the premiums paid is only taxed if you cash out before death.

 So careful consideration should be made as to how long you want to have life insurance protection, and whether you want to rent or own.

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