A few years ago, a new product design hit the term life market. It was (and is) a universal life insurance product that looks and costs very much like level term insurance. Since Dave Ramsey is a “term only” guy, he needed to clarify things when a few carriers introduced these universal life products that resemble term insurance. Ramsey calls the new products (not so new anymore) “Universal/Term life insurance”.
In this article, we will look closely at this product as well as explain and critique Ramsey’s advice regarding universal/term life insurance. Finally, we will make recommendations on what might be best for you.
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What is Universal/Term Life Insurance?
Dave Ramsey explains it well. Actually, Zander Insurance (the only life insurance company Ramsey endorses) explains this product on their website:
Recently, numerous life insurance companies have introduced new “Universal/Term” life insurance plans to compete in the term life insurance marketplace. Though the terminology “Universal/Term” may cause concern, these programs are actually built to resemble and function similar to term life plans and compete with their low costs.
We like that assessment for the most part. It addresses the concern that people might have when they receive a term quote showing a universal life product. Ramsey has made it clear that he does not think universal life insurance is suitable in any circumstance.
Side note: For our review of Zander Insurance, please see this article. We show some key differences between Zander Insurance and smaller, independent agencies.
So, universal/term is term life insurance built on a universal life insurance chassis. However, there is a reason why carriers are doing this. Neither Zander or Ramsey elaborate on this point. There are a few key differences.
Another name for traditional universal life insurance is adjustable (or flexible) life insurance. This flexibility gives the universal/term product attractive features not available in a standard term product. Other than these policy features, which we will address below, you won’t notice too much of a difference.
Protective Life’s Custom Choice UL
Probably the best known and most competitive universal/term policy is offered by Protective Life. Let’s look at the standard features of this product:
- 5 Plans from which to choose. 10, 15, 20, 25, and 30 year plans. Guaranteed level premiums for the term duration.
- Several riders: Accidental Death, Children’s Term Life Insurance, Disability Benefit, Accelerated Death Benefit for Terminal Illness, and Income Provider (for death benefit payout options).
- Convertible to a permanent UL product during the first 20 years of the policy.
The features listed above are fairly common among level term products. Conversion options vary, so you will find some products limit your ability to convert to a permanent policy to certain time frames or certain products.
What Makes Universal/Term Different?
Ability to Keep Your Policy Beyond the Term Duration
After the initial term duration ends, you have the option to continue the policy at a reduced death benefit. Your premium stays the same. This feature is unique to the universal/term product offered by Protective Life.
Most level term products will allow you to keep the policy, but the premium increase is astronomical. For example, if you pay $100/month for a 20-year term policy, it would not be unusual to see the premium increase to $1500/month in year 21 and see increases each year after.
If you choose to extend your policy, the death benefit will decrease every year until it reaches a minimum of $10,000.
You have the ability to adjust your premium. As Protective Life states, “You can choose to pay a level premium for a certain period of time, or can even adjust premiums to correspond with your expected income level.” This is not possible with a standard term policy.
Adjustable Death Benefit
You can adjust your policy death benefit during the term period. It can be decreased or increased within certain limits. Premiums would also decrease or increase. If you choose to increase the death benefit, additional medical underwriting would be required.
Almost all term products allow you to decrease your death benefit (and lower your premium). Nothing special there. The ability to increase the death benefit (without applying for a separate policy) is unique.
This feature allows you to skip premium payments if necessary. According to Protective Life, “The policy is guaranteed not to lapse as long as the Lapse Protection Account value equals or exceeds policy debt. The lapse protection guarantees the policy death benefit only, not the cash surrender value.”
Because this is universal life policy, the design allows for some flexibility in premium payments. A typical term policy will lapse if you miss a premium payment beyond the grace period (usually 30 days). Sure, you can apply for reinstatement, but you have to prove good health to do so.
Are the Differences with Universal/Term Really that Important?
If you just read the assessment given by Ramsey or Zander, you would think there are no significant differences. You won’t find anything earth shattering about the new product design, but the added flexibility could be helpful to some.
Let’s say you are starting a career that doesn’t allow a stable income. Perhaps you are in sales or run your own business. Having some flexibility in premium payments could be critical. Additionally, if you have a month or two with very high unexpected expenses, it would be nice to have options. Maybe skipping a premium payment would be very helpful to get through a tough stretch.
Keeping your policy beyond the level term period
As noted above, having this flexibility might be very important. Dave Ramsey says permanent life insurance is never a good idea. However, what if your financial plans don’t play out as hoped? What if you or a family member experiences a major health and/or financial setback? You might not be okay with a term policy that ends before you are financially secure. We all want to make sure our loved ones don’t suffer financially.
Going from $750,000 to zero overnight might be scary. Knowing you have the option to keep your policy at a reduced benefit (with the same premium) might be very important.
Those are the distinguishing features of the Universal Life product. Yes, most term policies give you the option to convert to a permanent policy. However, the premium increase might not be affordable. Having options is nice.
A Word About Universal Life Insurance
We have written about this subject in other articles, but it might help to clarify a couple of things here. Most people, including Dave Ramsey, equate universal life insurance with cash-value insurance. However, there is a type of universal life insurance that does not build cash value. Guaranteed universal life is a product that is very similar to term insurance, but it is designed to last your entire life. It is not designed to accumulate cash, but provide a guaranteed level death benefit. Just like term insurance, the premium is guaranteed to stay level.
It is important to note the difference because guaranteed universal life can work well for people who don’t like the idea of combining their life insurance with an investment component. Some people like the idea of having some permanent life insurance along with their term insurance.
Dave Ramsey on the New Universal/Term Life Insurance – Conclusion
Ramsey and Zander Insurance do a good job of allaying their readers’ fears when they see universal life. This new product termed “universal/term” by Ramsey is very similar to standard term insurance. However, they do their readers a disservice by not pointing out the benefits and key difference with this relatively new product.
When you receive comparison quotes and you see Protective Life’s Custom Choice UL among the lowest cost carriers, the added flexibility of this product could easily be the deciding factor.
Not all term products are the same. When you receive a comparison quote, ask about the differences. Some agents might say they’re all the same, but there are differences among policy provisions and riders that are important to consider.
Make sure you work with an independent agent that works with all the top carriers and can help you find the right product(s) for your situation.