New messages from Aflac | View Notifications opens a dialog Close X dismisses the notification alert

Term vs. Universal Life Insurance: What’s the Difference?

Life insurance provides you with a tool to financially help protect your loved ones and, in some cases, move toward your financial goals. Although there are many policy types, two popular options are Term and Universal life insurance. These have different features and benefits, suiting different policyholders. Furthermore, there are several sub-types of each policy that let you customize coverage based on your needs. Let’s dive deeper into how each policy type works and compare their features to help you determine the right option for you and your beneficiaries.

How does Term Life Insurance work? 

Term Life Insurance offers coverage for a fixed period from 10 to 30 years, depending on your preferences. Therefore, you may need to renew or get new coverage once your policy expires. Premiums are lower to account for your risk of outliving the policy. There are several kinds of Term Life Insurance policies:

Level Term Life Insurance 

Level Term Life Insurance has premiums that don’t change for the duration of the policy. This predictability can make it easier to build premium payments into your budget.

Yearly Renewable Term Life Insurance 

Yearly Renewable Term Life Insurance lasts for one year. It allows you to renew coverage annually without additional underwriting or a new medical exam. However, premiums will increase each year.1 This makes yearly Renewable term life insurance a more flexible option for policyholders who don’t need to lock in many years of coverage. For example, you may only need life insurance for special circumstances that may increase risk, such as travel.

Return of Premium Life Insurance 

Return of Premium Life Insurance refunds your premiums paid if you outlive the policy term. However, premiums tend to be higher than Level Term Life Insurance to account for the chance of outliving the policy.2 Additionally, if the policy lapses due to non-payment or policy cancellation, you may be disqualified from receiving a refund of premium payments. Overall, Return of Premium life insurance may work if you’re confident you’ll outlive your policy but want peace of mind.

How does Universal life insurance work? 

Universal life insurance is a flexible Permanent life insurance policy offering lifelong coverage. It may also come with a cash value growth component that earns interest at a specific rate depending on the type of policy you have. As the cash value grows, you can cash out some or all of the policy in several ways, including taking out a policy loan, withdrawing funds, and surrendering the policy.

Furthermore, Universal Life Insurance offers flexible premiums and death benefits. You can raise your death benefit through a premium increase or reduce your premiums by agreeing to a smaller death benefit. Several types of Universal life insurance exist, including:

Traditional Universal Life insurance

Traditional Universal Life Insurance offers lifelong coverage, along with flexible premiums and death benefits. The cash value grows at a fixed rate the insurer specifies. This policy is a good option for those seeking coverage flexibility and slower but safe wealth-building.

Guaranteed Universal Life Insurance

Guaranteed Universal Life Insurance offers fixed premiums that are lower than other universal policies. The difference is that this policy typically has little cash value.3 It’s designed for people who need lifelong coverage at more affordable rates than Traditional Permanent Life Insurance policies and don’t need an additional wealth-building vehicle.

Indexed Universal Life Insurance

Indexed Universal Life Insurance offers the same features as traditional universal life insurance. However, you can invest part of your cash value in a fund that tracks an index, such as the S&P 500 stock market index. The other part remains in a standard, interest-bearing account. This adds some investment risk if the index the fund tracks decreases. However, it could also lead to higher potential returns if the securities in the index perform well. Overall, an Indexed Universal Policy could provide a middle ground between Traditional and Variable Universal Life Insurance.

Variable Universal Life Insurance

Variable Universal Life Insurance works like Indexed Universal Life Insurance, but you can invest your cash value into various mutual funds across different investment accounts. These mutual funds may consist of stocks, bonds, or other assets. This could offer the fastest potential cash value growth if the investments perform well, potentially helping you take advantage of your cash value earlier.

However, there is a greater risk of losses should the investments perform poorly. If your cash value drops too low, your death benefit could decrease, or your policy could lapse. Therefore, these policies may work best for those with higher risk preferences or who feel confident managing their own investment selection.

Peace of mind doesn't
have to break the bank

Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.

Get a Quote

Differences between Term and Universal Life Insurance 

Term and Universal Life Insurance differ in several ways:4

Coverage length 

While Term Life Insurance is a temporary policy, all forms of Universal Life Insurance help cover you for life, as long as you continue making premium payments.

Cash value 

Term Life Insurance lacks a cash value growth component, excluding it as a wealth-building option. On the other hand, Universal Life Insurance offers cash value.


Universal Life Insurance charges higher premiums than Term Life Insurance, given the same death benefit. These higher premiums account for this policy’s lifelong coverage and cash value component.


There are a range of Term Life Insurance policies to choose from. Each offers different premium structures and other features to suit varying needs. Once you purchase a policy, however, you typically lock in your premiums and death benefit.

Universal Life Insurance also offers several policy types. However, most of them let you adjust the premiums and death benefit. The exception is Guaranteed Universal Life Insurance, which aims to balance Term Life Insurance’s simplicity with Universal Life Insurance’s lifelong coverage.

Which life insurance policy is right for me? 

Here are some cases where Universal Life Insurance could be your best option:

  • You need lifelong coverage: Many prefer the added peace of mind that comes with lifelong coverage. If you don’t want to worry about renewing your policy and want to lock in premiums early, a Universal Life Insurance policy may help.

  • You have complex financial needs: Universal Life Insurance’s cash value offers an extra way to build wealth, helping you meet more complex financial needs and save for goals like retirement or college costs. You can choose the stability of Traditional Universal Life Insurance, the higher risk and reward potential of Variable Universal Life Insurance, or balance risk and reward with Indexed Universal Life Insurance.

  • You want to enhance your estate planning: Life insurance death benefits are not taxed as income. If you place the policy in an Irrevocable Life Insurance Trust, they also don’t count toward your estate tax threshold.5 This can help you pass down more wealth to your heirs tax-free compared to not buying the policy and passing down the saved cash.

Here are some situations where Term Life Insurance may work better:

  • You have a smaller budget: Term Life Insurance policies offer the most coverage per dollar spent, even compared to Guaranteed Universal Life Insurance. They may work if you have a smaller budget for life insurance.

  • You need coverage for a specific period: Term Life Insurance works well if you need coverage for a specific time. For example, you may get a 30-year term life policy if you’re starting a family. This policy can help protect your children when they depend on you financially, then expires once they are self-sufficient adults.

  • You prefer simplicity: The lack of a cash value component makes Term Life Insurance simpler. If you don’t need the additional wealth-building vehicle, Term Life Insurance can offer coverage with less complexity.

Get a life insurance quote today

Term and Universal Life Insurance each suit different needs. Term Life Insurance can work well if you want the most coverage per dollar spent and don’t need more avenues to build wealth. On the other hand, Universal Life Insurance can suit you if you have more complex financial needs and prefer to pay more for peace of mind.

Aflac offers a range of Life Insurance policies that may fit your coverage needs and budget. Speak with an agent today to explore our policy options and get a quote.

Still have questions?

Explore your life insurance options.

Get a Quote