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Which type of life insurance should i buy? Term Life Insurance or Permanent Universal Life Insurance?

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After purchasing my first home i was told and advised by my bank to get a life insurance for myself and my wife. Is it really necessary to buy life insurance when i am trying to save enough money to pay my monthly mortgage? If it is really necessary to buy life insurance, which type of life insurance should i go for? The term life insurance or the permanent universal life insurance? I do not know if it is because those bankers are just trying to sell me some life insurance product for their own goals and commissions.

Life Insurance

asked in Edmundston by Andrew Randall (194 points)

1 Answer

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After you purchased your house using a mortgage, it is advisable and sensible to purchase a life insurance for you and your spouse if both of you will be paying for the house mortgage. One simple reason being that in case of any unexpected death of you or your spouse, the other surviving spouse can claim for the life insurance payout. This payout could help the surviving spouse pay off some or most of the outstanding mortgages depending on how much life insurance was purchased. Without this life insurance payout, it will be very difficult for the surviving spouse to pay for monthly mortgage alone. People say that they can't afford to pay for a life insurance premium but i say that poor people should purchase a life insurance and make it a priority to pay the life insurance premium because in the future, in case of any unexpected death, the life insurance payout could save the financial collapse of the surviving spouse.

Term life insurance and Permanent universal life are two of the most popular life insurance choices. Term life insurance works pretty much like your car insurance. You make a payment monthly for your term life insurance for a specified amount of life insurance coverage and for a specified number of years. This term life insurance does not have any surrender cash value, which means that in case you decide at any point of the coverage period, you do not want to continue being covered by your term life insurance policy, you can opt out of your life insurance policy. You will not get any cash value in return after surrendering your term life insurance. Term life insurance usually covers a larger amount of money for a decent and cheaper monthly premiums than a permanent universal life insurance.

For example, you purchased a term life insurance of $500,000 for a period of 40 years. The monthly premium lets say would be $120 per month. In case of your death during this 40 years coverage period, your beneficiary will get the full $500,000. However, Your beneficiary will not receive the amount for the premiums you paid ($120 per month for the number of years until your death). Your beneficiary will only get the $500,000. But if you decided to give up your term life insurance after 10 years, you will not get your money back at all, not even the premiums that you paid during the 10 years past. If after 40 years, you still want to continue being covered by term life insurance for the same amount, the monthly premium will very likely become very expensive due to your old age.

Universal life insurance is more permanent in nature and it usually continues until the insured person dies. This type of life insurance also has cash surrender value which means if at any time, you decide to surrender your universal life insurance, you will get back a certain amount of money for the premiums that you paid all these years. Some portion of the premiums you pay every month is being allocated to your cash value policy account. The interest earned in this cash value policy is also added back to itself. After a certain number of years, when the cash value in your policy has risen enough to pay for the premiums, you will not be required to pay any more monthly premiums and at the same time you will still be covered for the original amount of coverage. Generally, this type of universal life insurance is more expensive to purchase and the coverage amount may be quite low compared to term life insurance.

For example, you purchased a universal life insurance coverage for $100,000 for 25 years and your monthly premiums is $350. Every time your monthly premiums is paid, you get a certain amount of cash value. In case after 10 years, you decided to surrender your universal life insurance, you will get back the amount collected in the cash value account called the surrender cash value. If you continued paying for your universal life insurance until after 25 years, depending on how much your cash value had accumulated, you might not be required to pay any premiums anymore for the rest of your life till your death. You will still be covered for the original amount of coverage ($100,000) and this amount will be paid out to your surviving beneficiary upon your death.
answered by Deborah Nelson (108 points)

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