Term Life Insurance VS Universal Life Insurance

With our 2nd baby here I've been more conscious that my wife and I have inadequate life insurance coverage. Mainly due to procrastination, we currently don't have any life insurance for my wife. Our objective is to ultimately self-insure, so once we reach our financial freedom goals, I don't believe life insurance will be necessary for us. Given our goals that means to me that we likely will only need some life insurance coverage for roughly the next decade or even less.

During our annual benefits enrollment at work I noticed that my wife was eligible to signup for a my employer's group universal life offering. If you are like me, I've always heard the personal finance conventional wisdom to buy a term life insurance policy rather than whole or universal life insurance as the additional features of these policies are unnecessary and add to the insurance cost.

I was intrigued at least enough to at least do some research on Universal Life insurance vs term life insurance to see if this company benefit might be beneficial:

  • Term life is a fixed rate insurance for a fixed duration typically 10-30 years. The insurance cost is averaged over the life of the policy so you are paying a fixed rate over the life of the policy.
  • The universal life policy offered through work is basically an annual term life policy, which means the rate changes (ie. goes up) every year as your age/risk increases. It also offers an optional cash accumulation fund, but its not required to participate. I'm ignoring the cash accumulation fund from this comparison.

  • A plus for the Employer Group Universal Life Policy is there is no medical exam required whereas the cheapest quotes for term life insurance all appear to require a medical exam.
  • Another advantage of the Employer Group Universal Life Policy is I am able to adjust the coverage amount on an annual basis. Over the next 10 years as we continue to grow our net worth, we should be able to reduce the amount of life insurance we need each year, thereby further reducing our insurance costs until we cancel the policy all together.

Here is a comparison of the projected costs over 10 years for my wife for $200k of life insurance coverage with my employer universal policy vs the cheapest 10yr term life quote I could find online:

 

Employer GUL Policy

Cheapest Web Quote Term Life Policy

Year 1

$ 50.40

$ 104.40

Year 2

$ 57.60

$ 104.40

Year 3

$ 67.20

$ 104.40

Year 4

$ 69.60

$ 104.40

Year 5

$ 79.20

$ 104.40

Year 6

$ 79.20

$ 104.40

Year 7

$ 88.80

$ 104.40

Year 8

$ 103.20

$ 104.40

Year 9

$ 112.80

$ 104.40

Year 10

$ 124.80

$ 104.40

10Yr Cost

$ 832.80

$ 1,044.00

You'll see the insurance cost at least in year 1 is half the cost of equivalent of the annual cost of a 10 term life insurance policy. After 10 years of the same coverage the employer group policy is projected to be about 20% cheaper.

Risks with Employer Group Universal Life Insurance

  • Layoff/leaving employer - If I left my employer the policy could be converted to a individual policy, but the rate appears to be 2x-3x higher.
  • Employer discontinues benefit - it seems as though employer benefits are diminished on an annual basis so I thinks its a reasonable risk that this benefit could be discontinued in the future
  • Price increases - employer GUL contract is up for renewal in 2018 which could significantly alter rates in future years.

Based on this we are going to move forward at least for now with adding a life insurance policy for my wife through my employer offered benefits. It seems like an easy decision at this point with the additional dollars it keeps in our pockets for at least the early years and we think they are worth the potential risk at this point.

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