Term vs. permanent life insurance

 

Life insurance is one of the most important investments you can make, and it is important to understand the different types of coverage available. There are two primary types of life insurance: term and permanent. Both have their own set of pros and cons, so it’s important to carefully consider which one is right for you.

• Term life insurance is typically much cheaper than permanent life insurance. It provides coverage for a specific period of time (the “term”), usually 10 to 30 years. 
• Permanent life insurance, on the other hand, covers you for your entire life. It’s more expensive than term life insurance, but it has some cash value component advantages. The flexibility to access cash value through loans or withdrawals can be helpful in retirement planning. 

So which type of life insurance is right for you? The answer depends on your unique circumstances and needs. If you are young and healthy, term life insurance may be the best option. If you are older or have health issues, permanent life insurance may be a better choice. To better understand your options, let us review both in closer detail so you can make an informed decision.

What is term life?

Term life insurance is a type of life insurance that provides coverage for a set period of time, typically 10-30 years. If you die during the term of the policy, your beneficiaries will receive a death benefit. If you live until the end of the term, the policy will expire and you will not receive a death benefit. However, it is important to remember that term life insurance does not build cash value and will expire at the end of the term.

• Term life policies are temporary protection with a specified duration that ranges from one year for annual renewal policies up to 30 years typically.
• Term life insurance policies tend to cost considerably less than permanent life insurance and are also easier to qualify for in many cases.
• There are four primary types of term life insurance; here is what each has to offer:

Level term life insurance

Level term policies are the most common term life insurance policies. They offer a fixed death benefit at a fixed premium amount. The lower your age and the better your health condition, the lower your premium payment will be.

Increasing term life insurance

This type of policy offers the flexibility to increase your death benefit at a later time. Some insurers offer different options when and how you can increase that death benefit. Most policies contain limits on how much you can increase the death benefit and how far down the road you can increase it.

Increasing term life is ideal if you expect to have increased financial obligations in the future, such as buying a house or growing a family.

Decreasing term life insurance

Decreasing term policies have a death benefit that is reduced over time at predetermined rates. This is ideal for those who expect fewer financial liabilities as they age.

If your dependent children are approaching adulthood, or maybe your mortgage is almost paid off, then you won’t need that much coverage in the future.

Convertible term life insurance

Convertible policies offer the option to convert from a term policy to a permanent life insurance policy later. These policies make it easier for you to get a lot more coverage at the beginning, when you may need it most, at the lowest price. When your priorities and needs change, you can convert to a permanent life insurance policy.

This covers most of the term life insurance plans you will encounter. Term life insurance policies  also offer a variety of riders that will give you even more flexibility in selecting the coverage you need.

What is permanent life?

Unlike term life insurance, permanent insurance policies provide lifelong coverage to the insured. As long as the premium payments are paid, coverage is guaranteed. Permanent life insurance has two features; a death benefit and a cash value component. There are multiple types of permanent insurance, each with unique features and benefits.  The most common types of permanent life insurance are set out below.

Whole life insurance policies

Whole life is by far the most common type of policy issued. With this type of policy, the death benefit and premium amount are fixed for as long as the policy is in force.

An attractive feature of whole life insurance is the guaranteed rate of return on the cash value component of the policy. There is a guaranteed rate of return on that cash value which means it will grow at a predetermined rate for the entire policy life.

Additionally, some permanent whole life policies offer dividends on the cash value accumulation. You can make use of these dividends to lower your premiums, leave them to accumulate interest, or take them as cash payments.

Universal life insurance policies

Universal life insurance policies offer greater flexibility in death benefit and monthly premiums. Universal policies allow you to increase the death benefit of the policy or apply a portion of the accumulated cash value to your monthly premium payments.

Universal life insurance still offers permanent life insurance features and the flexibility to manage the death benefit amount and premiums.

Variable universal life insurance policies

Variable life policies give you further flexibility over the cash value accumulation component of your insurance policy. Whereas universal and whole life policies have a guaranteed rate of return, the rate of return is also fixed; it cannot increase.

With a variable life policy, life insurance companies let you invest in sub-accounts that offer various investment options tied to financial markets. Since there are multiple sub-accounts, you can set up each sub-account with a mix of different investment options. You can have an aggressive mix on some and a more conservative mix on others.

If your investments do well, your cash value will increase.  Conversely, if the investments do poorly, the cash value component will decrease

Indexed universal life (IUL) insurance policies

Indexed universal life policies offer the ability to capitalize on the growth of the stock market. The insurer will have a stock market index that the policy is tied to, such as the Nasdaq composite or the S&P 500.

IUL policies do not have a fixed interest rate feature. The rate of return on your investment component will vary based on the index tied to the policy. However, there is a minimum interest rate guarantee which assures you that you won’t go in the negative, while you can still participate on the upside.

All of these different types of permanent life policies offer the important protections of permanent life insurance: a guaranteed death benefit, lifelong coverage, and a cash value component.

Now, let’s compare the features of term life insurance vs. permanent life insurance.

Term vs. permanent life: policy features

There are some marked differences between permanent life insurance and term life insurance. Here is a comparison of the most important features of each:

Term life insurance:

• Coverage is for a specific, defined period of time. There are a variety of terms on offer, the most typical being 10,15,20, and 30 year terms.
• You can choose to renew your policy at the end of the term, but your monthly premiums will change when you renew.
• At the end of the term, the policy expires. If you outlive the policy, there is no benefit received other than being protected during the term.

Permanent life insurance:

• Coverage is permanent for your entire life.
• The death benefit and monthly premiums are set for life.
• Coverage will not expire as long as you pay the premiums required, so you don’t have to be concerned about renewing it.
• When the policy is paid up, you continue to benefit from coverage and the cash value accumulated.

Term vs. permanent life: cost

One of the most striking differences between term and permanent life insurance is the cost of the amount of coverage. Term life insurance is typically more affordable than permanent coverage, making it a great option for younger adults or those on a tight budget. However, it’s important to keep in mind that term life insurance only provides temporary protection. If you pass away during the term of your policy, your beneficiaries will receive a death benefit payout. Once the policy expires, there is no death benefit payout.

Permanent life insurance, on the other hand, offers lifelong protection. This means that as long as you continue to pay your premiums, your beneficiaries will receive a death benefit payout regardless of when you pass away. Permanent life insurance also comes with some additional benefits, such as the ability to build cash value and tax-deferred growth.

Term vs. permanent life: advantages

Advantages of term life insurance:

• lower in cost
• easier to qualify for
• simple and easy to understand.

Advantages of permanent life insurance:

• lasts for your entire lifetime
• you can build cash value
• you can use it to transfer wealth tax-free to your heirs
• you are able to make withdrawals or borrow against the cash value of the policy.

Term vs. permanent life: disadvantages

Disadvantages of term life insurance:

• You are only covered for the term, and then it expires
• your cost of insurance will be higher if you renew or buy a new policy.

Disadvantages of permanent life insurance:

• it is more expensive than term life insurance
• it is harder to qualify for.

Who needs term life insurance?

Term life insurance is ideal for those that need the largest amount of death benefit coverage at the lowest cost. Young people with a family that depends on their income and limited budget can benefit from term life insurance more than from a permanent life insurance policy.

Who needs permanent life insurance?

Permanent insurance is ideal for those looking for lifetime coverage and can afford higher premiums for the same death benefit amount as term life insurance. You will need a permanent life insurance policy if you want to leave money to your heirs without paying estate taxes.

Why is term insurance often better than permanent insurance?

Term life insurance is usually better than permanent life insurance for several reasons. First, it gives you the most coverage for the money. Permanent life insurance costs 3-10 times more for the same death benefits depending on your circumstances, such as health and age.

Term life insurance is easier to get. If your health is not good enough for permanent life insurance, term life can get you covered practically regardless of your health. Guaranteed issue and simplified issue policies are quite common. Though the coverage may be limited, you can still get covered.

Frequently asked questions

What happens to term life insurance at the end of the term?
The term life insurance policy will expire. You have the option to renew in many cases, but your premiums will increase at that time.

What are the downsides of a permanent life insurance policy?
Permanent life insurance is harder to qualify for, and it also costs more than term life insurance.

Can you cash out a term life insurance policy?
Most term life insurance policies do not have any cash value component. A very limited few may offer a rider that will allow a term policy to accumulate cash value.

What are the longest terms for term life policies?
The majority of term policies cap at 30 years, although there are some that go up to 40 years.

Is term life better than whole life?
Whether a term or permanent life insurance plan is better depends on the circumstances and goals of each individual. Term life insurance can be a better option in many cases. If you are young and need the most coverage at an affordable cost, term life is the better option. If your health precludes you from qualifying for permanent life insurance, then term life is the best and only option.

If you want life insurance coverage during your entire life, then permanent life insurance is preferable. For example, suppose you want to build cash value to accumulate tax-deferred assets. In that case, permanent life insurance is the better option.

Conclusion

Term life insurance and permanent life insurance both have advantages and disadvantages. Which type of insurance is best for you will depend on what you want to accomplish now and in the future.

Fortunately, life insurance is such a flexible product that you can tailor your coverage to reach any goal you want. You just need the right guidance. We covered in as much detail as possible what each type of insurance plan can offer. There is much more than that though, but doing so in general terms is limited to what we shared. 

If you’d like to make a true comparison of your options, talk to one of our licensed insurance professionals so you can get a personalized plan.

Give us a call today.