Life insurance is designed to give you peace of mind as you financially provide for your loved ones after your death. If you’ve decided to purchase life insurance, you’ll likely be choosing between term life insurance and a permanent policy. each policy has pros and cons that should be considered when purchasing life insurance.
Although term life insurance is often less expensive than permanent coverage, it only lasts for the duration of the selected term. permanent life insurance can be more expensive, but it lasts a lifetime as long as you continue to pay premiums. Understanding the differences between permanent life insurance and term life insurance can help you choose the policy and coverage that best fits your family’s needs.
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 duration of your policy, you’ll also select the amount of your death benefit, which is the amount that your beneficiaries will receive when you die.
Most experts recommend reassessing your policy about a year before it expires. that way, you have time to evaluate your options. Some insurers will 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, which means your policy will end, you will stop paying your premium, and your beneficiaries will no longer receive a death benefit after you pass away.
Why would you choose life insurance that expires after a certain amount of time? term life insurance policies are typically cheaper than permanent life insurance policies. Often people only want life insurance for a certain period of time, such as when their children are young. If you’re nervous about paying for a policy that will end, you may want to look into term life insurance options, such as return-of-premium policies.
pros and cons of term life insurance
what is permanent life insurance?
Permanent life insurance is a type of life insurance policy that remains in force throughout your life. As long as you pay your premiums, your death benefit is guaranteed to be paid to your beneficiaries under most circumstances. Keep in mind that permanent life insurance policies are significantly more expensive than term life insurance policies, but may be worth it for those who want lifetime coverage.
Unlike term life insurance, most permanent life insurance policies come with a cash value component. As you pay your premiums, that money accumulates in a savings or investment account, through which you earn interest or returns. If the cash value account grows to a certain amount, you can start paying your premiums out of it. You can 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 works essentially like a savings account. earn interest on the cash value component of your policy.
- Universal Life Insurance: With this policy, you get permanent life insurance plus a cash value component that earns returns based on the performance of your investments. You can also adjust your policy’s death benefit.
- Variable Life Insurance: This gives you the most flexibility but also the most risk. You get permanent life insurance, and you can invest your cash value component however you like. The problem is that if your investments don’t perform well, losses can reduce your death benefit.
pros and cons of permanent life insurance
term life insurance vs. permanent
When comparing term life insurance to permanent life insurance to determine which policy makes the most sense for your family or situation, you may want to pay particular attention to the length of the policy and the cash value component .
If you only want coverage for a certain period of time—for example, while your children are still financially dependent on you or while you’re actively paying off your mortgage—term life insurance may be the right option for you. On the other hand, if you have a lifetime dependent, such as a child with special needs, you can opt for the lifetime coverage offered by permanent life insurance.
The cash value account associated with permanent life insurance policies can act as an investment vehicle, but you’ll pay higher premiums for this type of policy. you may want to consider whether the cash value account is worth it or if you prefer to invest outside of your life insurance policy.
*assuming you choose a level term policy.
**assuming your death benefit amount does not change while your policy is in force.
why choose term life insurance?
If you’re looking for life insurance on a budget, you may find that term life insurance is a more affordable option than permanent life insurance. people often choose term insurance for:
- Lowest Premiums: Term life insurance can often be five to 10 times cheaper than permanent life insurance. If you don’t have a lot of money on hand each month, term life coverage might be your best option.
- Put money toward specific financial goals: There may be a specific financial burden you want to make sure your family doesn’t have to shoulder if you die prematurely. that could be financing college tuition, paying for the house, or something else entirely. If you have a timeline for that financial goal, you can purchase a term policy for that same timeline to ensure that if you’re not there to help, your loved ones can still complete that goal.
- A temporary solution: Some people choose term insurance with the intention of purchasing permanent life insurance when they can afford it. This sets up coverage to protect the people you care about most, and you can re-evaluate your coverage needs and budget at the end of your policy term.
- Permanent coverage: If you want a life insurance policy that lasts your entire life instead of just one term, 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 choose a variable policy and invest your cash value to play on markets, your permanent insurance allows you to pocket some money from your policy if you need it.
- Cheaper coverage when you’re young: While a permanent life insurance policy will generally 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. Let’s say you are 35 years old. compare the premium payment on a permanent life insurance policy for you now to a term life policy if you buy it when you’re 55. the cost can be about the same, and you’ll get the cash value component as an added benefit.
what is the best life insurance company?
Which is cheaper: term or permanent life insurance?
When should I buy life insurance?
what happens to term life insurance at the end of the term?
why choose permanent life insurance?
Although it is often much more expensive, permanent life insurance never expires and offers you a way to save or invest a portion of your premiums. With the interest or dividends on your policy, you may even be able to pay your permanent life insurance premiums.
Ultimately, you may opt for this type of life insurance for:
alternatives to term and permanent life insurance
Term and permanent coverage are the two most common types of life insurance, but they aren’t your only options. For example, you may want final expense insurance to cover your funeral costs. you may want to explore all the different types of life insurance before making your final decision.
frequently asked questions