Term vs. GUL – What Makes Sense for You?
In this article we will explore the differences between a Guaranteed Universal Life and term policy, when it’s appropriate it to use one vs the other, and situations where it makes sense to use both.
Why Term vs. Guaranteed Universal Life Insurance?
If you’ve ever taken a meeting from your local New York life agent – you were probably pitched two different products – Whole life first, and then the term you were originally looking for.
Whole life is the best product for people who want permanent life insurance that accumulates cash in a rock solid tax free* vehicle that is not tied to the market in away.
Unless overfunded, there won’t even be any cash to borrow for the first five or so years, and it will be more than 10 years before you get back to what you put it in (not adjusted for inflation of course)!
Whole life and Term Life insurance are two completely different products designed to achieve radically different objectives.
They really don’t have all that much in common – and whole life especially is often inappropriately sold to unaware clients for the sole purpose of boosting agent commissions and company revenue.
Where GUL Fits in
Guaranteed Universal life policies (or GULs) offers a much more interesting comparison to term insurance.
Guaranteed Universal Life policies are still more expensive than a term policy of the same face amount – but they can guarantee lifetime coverage for about half the cost of a whole life policy.
If you’ve never heard heard of Guaranteed Universal life insurance that’s ok – you aren’t alone! A GUL is a life insurance policy that you can use to guarantee coverage up to a specified age, whether it’s 90, 100, or even 121 (or anywhere in between).
Most agents don’t sell a lot of universal life for a couple reasons:
- It’s cheaper than any other permanent product, and thus has lower commissions
- They don’t understand the product
- They have a hard time getting their client to understand the product.
Because of this, it doesn’t get as many mentions in ads, articles on the internet, or cold calls as term and whole life do.
Most life insurance purchasers tend to be split into two groups of people:
- People who want life insurance coverage and don’t want to pay more than they have to.
- People who want to take advantage of the tax free accumulation of cash (for infinite banking, supplemental retirement income, wealth transfer etc) and are looking to put lots of cash into them
There is another group, older people looking to take out $10k-25k simplified issue whole life policies for final/burial expenses, but we aren’t counting them for the moment.
These groups, as you may have guessed, don’t look too much alike.
By sheer number of policies, the percentage of people in the first group is above 80%, so if I had to hazard a guess, I would put you there too. Let’s call them the ‘I want affordable coverage group’
For the affordable coverage group, there are two good options:
- Buy a term policy that goes 10, 20, 30 or now even 40 years – which should aim to cover all of your working career, but which will most likely lapse and disappear before you pass away.
- Buy a GUL policy that will be in place longer than your life expectancy (and potentially all the way to age 121), and expect your beneficiaries to collect the death benefit.
The GUL Makes More Sense For:
- People who want to make sure their beneficiaries receive money
If your most important concern is ensuring that your beneficiaries receive the death benefit, guaranteed universal life is a much better choice than whole life or term. While you won’t build up much cash value with a GUL, it is significantly cheaper.
An additional positive – GULs have guarantees to ages 90 or above – and are flexible about those guarantees too.
Unlike a term – if it turns out that you’re healthy in your 80s and all of the sudden 90 doesn’t seem so far away you still have options!
How to deal with a Guaranteed Universal Policy that is approaching it’s maturity date:
You can either start increasing the amount of premium you pay OR reduce the amount of coverage to extend the age guarantee. With a term after age 70, you generally don’t have any options left except to die earlier if you want your life insurance coverage to pay!
If you are looking for term policy that goes past age 75, you might also want to reconsider that term policy, because again, you are using a product that really wasn’t designed for old age.
Term insurance’s chief purpose is to give you a very high face amount coverage that protects the future potential of your remaining human capital – all the money that you’ll make between tomorrow and your last day of intended work.
It is also frequently used as mortgage protection, but the idea here is that you will also not have to worry about a mortgage by the time you’ve retired, or if not by then, very soon after.
One other great reason where a guaranteed universal life policy is better than any other type is when you want to make a serious donation to charity. By taking out a policy on yourself with your favorite charity as either owner (this gets you upfront tax benefits) or the just the beneficiary you can turn your monthly payment into some seriously large donations!!
GUL as a Charitable Maximizer
Nate, a successful friend of mine regularly donates to his church. He usually tithes about $6000 a year – which the church receives as a monthly cash transfer from his bank. I suggested this alternate strategy to him:
Continue to give the church $100/mo, which is $1200 a year, so he can continue to help the church with their short term cash needs.With the remaining $4800 a year, purchase a Guaranteed Universal life policy that will pay out when he passes away.
Nate is 41, and in good health ( He runs 10ks for fun) so, for $4800 a year he could get this:
Donating almost $675,000 should be enough to get your name on the door at most places (if you’re into that sort of thing).
If Nate makes the owner the church while still paying the premiums, they would still be tax deductible too – so there is no tax penalty for Nate doing it this way.
When Term Insurance is Better
It would be easy to say that Term insurance is better for everything that was not covered in the above article, but that is not quite true.
Term life is the most effective way to protect your family from the loss of your future income. So unless you are planning to retire in the next year or two or have no loved ones to protect, you NEED a term life policy.
Term is the most efficient way to guarantee large amounts of coverage for long (but not forever) amounts of time, and specifically efficient to protect your spouse and your assets from the early part to endpoint of your working career.
What about my coverage at work?
The most common objection I get from people who are on the fence about term life is that they already get life insurance coverage from work. While that is certainly true, the policies from your workplace tend to be comparatively small, and they go away as soon as you get fired or leave your job.
At first glancy you might argue that the policies are small – you can often get up to 4x salary coverage for free or for a low price, but remember – you are gone forever if that happens!
Even assuming the policies pay out (most don’t because most people get sick and stop working before they eventually pass) is four years of salary enough for your family?
If you weren’t planning on retiring with plenty in the bank four years from now, the answer is no!
If you are younger and looking for term, you should be looking at big policies!
After all, if you make $50,000 and plan on working for another 30 years, that’s still $1.5 million in accumulated earning potential that you family is relying on. Forget to look both ways before you cross the street, and suddenly your loved ones are going to need to scrape up $1.5 million bucks or change their standard of living.
But don’t worry, they are much more affordable than you’d think when you are in your thirties and forties – even $1.5 and $2 million dollar policies are surprisingly affordable.
Other Popular Uses for Term
Besides specific protecting your future human capital (the amount of money you will bring in between now and the day you stop working) term is great for covering obligations with very specific end dates.
The most popular version of this is Mortgage Protection Insurance which is just a fancy way of buying life insurance for the amount of your outstanding mortgage debt.
That way, if anything happens to you, your beneficiaries get a check that can cover the amount of the mortgage that is outstanding. This prevents them from having to fire sale the house before the bank forecloses on it, or struggle to keep up with the mortgage payments that will continue to show up every month.
Divorce courts often require insurance to be taken out too!
If you are ever in this unfortunate situation, the spouse who is providing alimony and/or child support usually needs either sufficient assets or life insurance in place to cover the total sum that is due to the receiving spouse.
The good news is that you can get a term policy that can efficiently cover this need.
(Often the payor spouse is also require to assign the ownership over to their ex-spouse and depending on the divorce decree, the beneficiary may have to be designated irrevocably – this can get a bit tricky – so be sure to work with someone who knows what they are doing.)
How to Save 63% on Your Life Insurance Policy
No matter which policy you buy, it’s important to get it locked in now. Most people who complain about life insurance being too expensive all have one thing in common – they are looking too late.
Recently, I’ve placed a couple of 10 year term policies with people in their early 70’s, and they were thankful to pay $400 and $500 for $100,000 in coverage.
Had they reached out to me 10 years earlier, they could have gotten a twenty year policy that will expire at the exact same age for less than $128 a month.
Not matter how old you are, you aren’t getting any younger! If life insurance coverage is important to you or your family, schedule a free consultation with me today for either a term or GUL policy.