Term life insurance vs. universal life

Q: My wife and I have two joint life insurance policies. The first one is term life with a death benefit of $250,000 that we purchased in 2004 and the second one is a universal life with the death benefit of $500,000 that we purchased in 2009. The current fund value of UL is $11,051. The premiums that we are paying are $150 for UL and $25 for term life. Our term life policy matured this year and our premiums for the new term have increased to $73. We would like to keep one policy and cancel the other but we don’t know which one we should stick with. We have two kids ages 10 and 8, $100,000 worth of mortgage remaining, $40,000 in car loan and no other debts.

—Sam K., Toronto

A: The first step is to determine how much coverage you need. For that, you can check out a needs analysis calculator.

The downside of cancelling the universal life plan is there may be penalties if you draw out the cash surrender value. Also, if the universal life policy has a guaranteed cost of insurance, the pricing could be very favourable because you were younger when you took the policy. Universal life policy costs have risen dramatically in recent years—some plans by as much as 40%—in response to historically low interest rates so your older plan could be at a very favourable rate in comparison.

Regarding your term plan, if you are still in good health you can likely get a new term plan for a lower cost. The reason being most term plans build a premium buffer into the renewal rates. So if you are still in good health you could qualify for a lower rate by reapplying. But make sure the new term plan is in place and in action before cancelling the old plan. Also have the broker complete a replacement disclosure for this. It will give you a snapshot comparison of the new and old plan.

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Lorne Marr, is the founder of LSM Insurance, an independent Canadian Life Insurance Brokerage company in Markham, Ont.

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