Term vs. permanent life insurance
If you are in the market for a life insurance policy, what you are really shopping for is a way to financially provide for your loved ones in the event of your death. In your preliminary research, you may come across term vs. permanent life insurance. Both types of life insurance offer financial assistance to your beneficiaries, but understanding the differences between the two can help you choose the best coverage based on your circumstances. Below, Bankrate’s editorial team will walk you through what you need to know about term and permanent life insurance.
What is term life insurance?
Term life insurance policies expire after a predetermined number of years — usually 10, 20 or 30. In addition to choosing the length of your policy, you may also select the amount of your death benefit, which is what your beneficiaries will receive when you pass away.
Most experts recommend reevaluating your term life insurance policy a year or so before it’s set to expire. That way, you have time to evaluate your options. Some insurers might allow you to renew your policy or convert your term life insurance to a permanent life insurance policy. You can also let your policy expire. In that case, your policy would end, you’d stop paying your premium and your beneficiaries would no longer receive a death benefit after you pass away.
So, why would someone choose life insurance that expires? Term life insurance policies are typically cheaper than permanent life insurance policies. Often, people only want life insurance for a certain amount of time, such as when their children are young. But if you’re nervous about paying into a policy that will end, you may want to look into term life insurance options called return-of-premium policies.
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Pros Cons Lower cost Policy expires at the end of the term Flexibility in choosing a term that meets your needs Premiums could go toward nothing if your policy expires Easy to understand Lacks the cash value component of other types of life insurance
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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What is permanent life insurance?
Permanent life insurance is a type of life insurance policy that stays in effect throughout your entire life as opposed to expiring after a set period of time. As long as you pay your premiums, your death benefit is guaranteed to pay out to your beneficiaries. Note that permanent life insurance policies tend to be significantly more expensive than term life insurance policies. However, it may be worth it for those who want lifelong coverage.
Unlike term life insurance, most permanent life insurance policies come with a cash value component. As you pay your premiums, money accumulates in a savings or investment account, through which you would earn interest or returns. If the cash value account grows to a certain amount, you could even begin paying your premiums with it. You may also borrow money against the account, using the accumulated cash value as collateral.
There are three main types of permanent life insurance:
- Whole life insurance: You get permanent life insurance plus a cash value component that essentially functions as a savings account. You earn interest on your policy’s cash value component.
- Universal life insurance: With this policy, you get permanent life insurance plus a cash value component that earns returns based on how your investments perform. You may also be able to adjust your policy’s death benefit.
- Variable life insurance: This gives you more flexibility but typically at a higher level of risk. You get permanent life insurance, and you may invest your cash value component how you choose. The issue is that if your investments don’t perform well, the losses might eat into your death benefit.
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Pros Cons Policy lasts for life Usually more expensive than term insurance Cash value component More complex than term insurance Not typically affected by medical concerns that arise after you purchase your policy If your invested cash value doesn’t perform well, you may incur losses
Permanent vs. term life insurance
When weighing permanent life insurance vs. term to determine which makes the most sense for your situation, you may want to pay special attention to:
- The policy’s duration
- The policy’s cash value component
If you only want coverage for a certain amount of time — for instance, while your children are still financially dependent on you or while you’re actively paying your mortgage — term life insurance may be the right option for you. On the other hand, if you have a lifelong dependent, such as a child with special needs, you may want to opt for the lifelong coverage that permanent life insurance offers.
The cash value account associated with permanent life insurance policies can act as an investment vehicle, but you’ll typically pay higher premiums for this type of policy. You may want to consider whether the cash value account is worth it or whether you’d rather invest outside of your life insurance policy.
| Term life insurance | Permanent life insurance | |
|---|---|---|
| Lower-cost premiums | Yes | No |
| Policy expiration | Yes | No |
| Cash value component | No | Yes |
| Level premiums | Yes* | Yes** |
*Assuming you choose a level term policy.
**Assuming you don’t change your death benefit amount while your policy is in force.
Why choose term life insurance?
If you’re looking for life insurance on a budget, you may appreciate that term life insurance is a cheaper option than permanent life insurance. People often choose term insurance for:
- The lower premiums: Term life insurance can often be five to 10 times cheaper than permanent life insurance. If you don’t have a lot of cash to spare each month, term life coverage might be your best bet.
- Putting money toward specific financial goals: There might be a specific financial burden you want to make sure your family doesn’t get saddled with if you pass away early. That could be funding college tuition, paying off a home loan or something else entirely. If you have a timeline for a financial goal, a term policy might help make sure that if you’re not there to help, your loved ones may still reach that goal.
- A temporary solution: Some people choose term insurance with the intention to buy permanent life insurance when they can afford it. This puts coverage in place to protect the people who matter most to you, and you can reevaluate your coverage needs and your budget at the end of your policy term.
Why choose permanent life insurance?
While it’s typically much more expensive, permanent life insurance never expires and can offer you a way to save or invest a portion of your premiums. With the interest or dividends from your policy, you may even be able to pay your permanent life insurance premiums.
Ultimately, you might opt for this type of life insurance for:
- Permanent coverage: If you want a life insurance policy that will last your whole life rather than just a period, permanent insurance may be the way to go.
- A savings or investment vehicle: Whether you choose a whole life policy for a conservative savings cash value component or you go with a variable policy and invest your cash value to play the markets, your permanent insurance policy generally allows you to pocket some money from your policy if you need to.
- Cheaper coverage when you’re young: While a permanent life insurance policy will typically cost considerably more than term insurance regardless of when you buy it, it might make sense to lock in a lower rate while you’re young. Say you’re 35. Compare the premium payment for a permanent life insurance policy for you now against those on a term life policy if you buy it when you’re 55. The cost may be roughly the same — and you’ll get the cash value component as an additional benefit.
Alternatives to term and permanent life insurance
Term and permanent coverage are the two most common types of life insurance, but they’re not your only options. For example, you might want final expense insurance to cover your funeral costs. Experts recommend exploring all the various types of life insurance before making your final decision and taking some time to calculate how much life insurance coverage you really need before committing to a policy.
Frequently asked questions
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The best life insurance company for you depends on your unique preferences and policy needs. An independent insurance agent may be able to guide you to the best life insurance companies that offer the right policy types for you. From there, you may want to explore each company’s qualifications and terms to see which is the right fit for you.
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Term life insurance is generally much cheaper than permanent life insurance. However, if you want lifelong coverage, you may want to opt for the more expensive permanent life insurance option, which remains in effect as long as you pay your premiums.
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Making end-of-life plans can be difficult, and as a result, many people wait until later in life to start planning for their deaths. However, you might want to take some time to research and choose a life insurance policy sooner rather than later to lock in lower rates than you could later on.
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Term life insurance policies are designed to expire at the end of the term. For example, if you have a 20-year term policy, it stays in effect for 20 years and then expires once the time has elapsed. Some term policies have a conversion element, which allows the policyholder the option to convert some of the coverage to permanent life insurance before the term expires. If you need more coverage once the term expires, you would have to buy a new life insurance policy at your current age, which also requires you to meet health and other underwriting guidelines for approval.
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Broadly speaking, permanent life insurance costs more than term life because of the lifelong coverage and added cash value component. Regardless of whether you get a permanent or term life insurance policy, your premium will most likely depend on your age, among other personal factors. In general, the younger you are when you purchase your policy, the less you might pay for coverage.
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