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Term or Universal Life Insurance? You Be the Judge
David H. Shantz
Vice President of Group Special Accounts
Great-West Life & Annuity Insurance Company
Greenwood Village, Colorado
Mark Pacana, DDS, in Algonquin, Illinois, has term life insurance. Carmella Fanelle, DDS, in Barrington, New Jersey, opts for universal life insurance. Two dentists, two types of life insurance. Which one is right? The answer: They both are.
The type of life insurance that you decide to purchase will depend on your circumstances. For example, according to the National Endowment for Financial Education, a nonprofit organization that educates Americans about personal finance, term insurance might be the most appropriate and affordable if you need substantial amounts of protection for a temporary period. Cash-value insurance (such as universal life) offers lifetime coverage along with a tax-deferred way to invest some of your money.
Term for Pure Protection
For Dr. Pacana, a term policy was the least expensive way to obtain the life insurance coverage his lender required when he applied for a practice loan. “The lender stipulated that I provide life and disability insurance as collateral for the loan,” he explains. “Because I previously had purchased term life to protect my family, I decided to assign part of it to the lender as collateral.”
Dr. Pacana plans to pay back his loan over 10 years, and he realizes that his term life insurance premiums will gradually rise each year as he grows older, but he expects his income to increase every year as well. He also knows that he is buying “pure protection” that, in the event of his death, will pay the face amount of the policy directly to his beneficiary or collateral assignee (in this case, the lender).
Universal Life for Flexibility
Dr. Fanelle, on the other hand, wants more than pure protection from her life insurance. “I like my universal life insurance because in addition to protecting my family, it provides an account to which I can add extra cash and earn a 4% minimum rate of return,” she says. Earnings are tax deferred as long as the contributions to the cash value account stay within Internal Revenue Service guidelines.
Dr. Fanelle tapped into the cash value of her universal life plan a few years ago for an unexpected home repair. She had the option of either withdrawing the cash value or borrowing against it, subject to policy restrictions (eg, withdrawal limits and penalties or interest due on borrowed amounts). “The bottom line is that I like the flexibility offered by universal life insurance,” Fanelle says.
Term or universal life—the choice is yours. To help make your decision, certain details should be considered.
Term might be preferable when:
- You need large amounts of life insurance protection and want to keep premiums at the lowest possible levels.
- You need insurance protection only for a defined or limited period of time (eg, 10 or 20 years).
- You do not wish to use life insurance for investment purposes (or you do not have the extra cash available to do so).
Universal life insurance might be the coverage of choice when:
- You are seeking long-term or permanent life insurance protection.
- You prefer life insurance protection coupled with the build-up of cash value.
- You like the flexibility of being able to make additional cash deposits when you have extra cash, and maybe skip deposits when times are tighter.
- You wish to accumulate assets and defer paying taxes on your earnings.
In short, the decision to own term or universal life should be made based on your unique insurance needs and circumstances. As Drs. Pacana and Fanelle illustrate, there is no right or wrong answer.
Editor’s Note: This article does not constitute legal or financial advice. Please seek professional input as appropriate to your situation.
David H. Shantz is vice president of Group Special Accounts at Great-West Life & Annuity Insurance Company. Great-West underwrites and administers the American Dental Association (ADA) Insurance Plans and is the sole provider of ADA-sponsored life and disability insurance to ADA members. For a free copy of the ADA’s Comprehensive Insurance for the Dentist handbook, call 888-463-4545 or go to www.insurance.ada.org.