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When you begin the search for life insurance, a good early step is to compare term life insurance vs. permanent life insurance. In addition to building a relationship with a licensed representative, understanding the basics of how each coverage type works — and the differences between the two — can help you choose the option with the features and benefits that best suit your situation.
Here's what to consider as you weigh term vs. permanent life insurance.
How Term Life Insurance Works
When you buy a term life insurance policy, you get coverage for a prespecified period of time, such as 10, 15, 20 or 30 years. For the duration of this term, you pay fixed premiums. If you die before the term ends, your beneficiaries receive the death benefit of the policy.
Term life can be a good choice for individuals who need financial protection for beneficiaries over a certain period of time. A prime example is a single-earner household with children. If the individual were to pass away while the children were still at home or in college, the financial loss of their income could be devastating to the family. But after the children have moved away, the financial risk may be reduced.
How Permanent Life Insurance Works
As the name suggests, permanent life insurance provides coverage for your entire lifetime as long as premiums are paid when due. Permanent life policies offer a death benefit and cash value. The death benefit is paid to your beneficiaries upon your passing. The cash value is a separate portion of your policy that builds interest that can be used during your lifetime. However, loans or withdrawals may generate an income tax liability, reduce the cash value and death benefit and cause the policy to lapse. Loans will also accrue interest. Premiums for the permanent life policy may stay the same or change over time depending on whether you have a whole or universal policy.
- According to the Insurance Information Institute, whole life insurance is the most common type of permanent life insurance. These policies offer the basic features of a death benefit and cash value that builds over time. All the while, the premium remains fixed.
- Universal life insurance can offer more flexibility than whole life. For example, policyholders may choose to increase the death benefit, but are typically subject to additional underwriting. They may also have the option to decrease the premium, but there must be enough cash value in the policy to help cover monthly charges. It's possible additional premium payments may be needed to keep the policy in force.
Term Life Insurance vs. Permanent Life Insurance
After you gain a basic understanding of term vs. permanent life insurance, you can compare the features and benefits to determine which type of coverage best suits your needs.
Here are the primary differences between term life insurance and permanent life insurance policies:
- Term life insurance policies offer coverage for a specified period of time, such as 10, 15, 20 or 30 years, whereas permanent life insurance offers coverage for your entire lifetime as long as premiums are paid on time.
- With term life insurance, the policyholder typically pays for fewer features in addition to the death benefit compared to permanent life insurance. However, permanent life insurance offers more than just a death benefit — it also builds cash value as a supplemental benefit for the policyholder. Certain permanent life insurance policies may also offer flexible premiums.
- Since term life insurance is temporary coverage that does not build cash value, premiums tend to be less expensive than permanent life premiums.
Ultimately, term life insurance may generally be more suitable for individuals who want basic life insurance coverage for a specified period of time. Meanwhile, permanent life insurance can be a great choice for individuals who would like coverage for a longer period of time, and possibly for their entire life, while potentially building cash value in their policy.
Since the purchase of life insurance is a personal financial decision that can greatly impact your life and the livelihood of your beneficiaries, it's wise to consult with a financial representative. These experts can help to guide you toward the decision that's right for you and your family.