Before you purchase a life insurance policy, you’ll need to decide which type is best for you and your family. The two main kinds of life insurance are term life insurance and permanent life insurance, which have a number of differences in terms of duration, coverage limits, and price.
We’re going to break down term life insurance vs. permanent life insurance, and help you figure out which one is better for your unique needs.
What is Term Life Insurance?
Term life insurance is a policy that covers you for a specific “term,” or number of years. Typically, term life insurance is available in terms of five to 30 year periods. Once the term ends, your coverage ends, unless you have the option to convert your term policy to a permanent policy.
One of the biggest draws of term life insurance is that it’s affordable. Term life coverage is often recommended for young families and healthy individuals who need a smaller amount of coverage. Another perk is that medical exams usually aren’t required.
With a term life insurance policy, you pay level premiums over the course of the term. There is also a guaranteed death benefit that your beneficiary will receive if you pass away during the term. Unlike permanent life insurance, term life insurance doesn’t have cash value.
Here are some of the major pros and cons of term life insurance:
Pros:
- More affordable premiums
- Medical exams are not always required
- Level premiums for the entire term
Cons:
- No flexibility to adjust premiums or the death benefit
- No cash value accumulation
- In most cases, coverage ends when the term ends
Types of Term Life Insurance
There are several types of term life insurance available, depending on what your insurance company offers. Here are some of the most common policies:
- Level term life policy: A level term life insurance policy is the most common, where you pay a monthly premium during the term, in exchange for a guaranteed death benefit if you pass away. Your coverage ends when the term ends.
- Renewal term life policy: With a renewable term life insurance policy, you can keep your coverage after the term ends, up to a certain age. Depending on your specific policy, some renewal term life policies have a level premium, while others have a premium that increases with age.
- Convertible term life policy: A convertible term life policy allows you to convert your term policy into a permanent policy when the term ends. Some term life insurance policies are automatically convertible, while others require you to purchase a rider in order to get this privilege.
- Return of premium policy: A return of premium term life insurance policy will return a portion of the premiums you paid over the term if you do not use your coverage. Some policies only return the base premium and not the extra premiums, but some policies will return both.
What is Permanent Life Insurance?
Permanent life insurance is a type of life insurance that provides coverage for your entire lifetime. When you pass away, your beneficiary is guaranteed to receive a death benefit, which can be used for any purpose.
Permanent policies also have cash value, which grows overtime like a savings account. Once your cash value reaches a certain balance, you can borrow against it, similar to a personal loan.
One of the biggest differences between term life and permanent life is the price. In most cases, permanent life insurance premiums are much higher, making it a less cost effective option.
Also, most people are required to take a medical exam in order to get permanent life insurance coverage. Older people and people with pre-existing health conditions typically pay the highest rates compared to younger, healthier people.
Here are some of the notable advantages and disadvantages of permanent life insurance:
Pros:
- Coverage lasts for your entire lifetime
- Policy builds cash value which can be borrowed like a loan
- Guaranteed death benefit
Cons:
- Premiums tend to be expensive
- Medical exams are usually required
- Can’t always control where your premiums are invested
Types of Permanent Life Insurance
There are many different types of permanent life insurance. However, keep in mind that not every life insurance company offers every type of coverage: The main difference between the various types of permanent life insurance is how the cash value grows. Here are some of the most common forms of permanent life insurance:
- Whole life insurance: Whole life insurance is the most common type of permanent life insurance. The cash value grows at a fixed interest rate, with a guaranteed minimum return, and it has level premiums.
- Universal life insurance: Universal life insurance allows you to adjust your premium and your death benefit as your coverage needs change overtime. The cash value is invested and grows based on stock market performance.
- Variable universal life insurance: With variable universal life insurance, your cash value gets invested in mutual funds, and has a greater growth potential. However, there is no guaranteed return, so you could lose cash value depending on market performance. This policy has fixed premiums and a fixed death benefit.
- Indexed universal life insurance: Indexed universal life insurance is similar to variable universal life, but your cash value gets invested in index funds.
- Final expense life insurance: Final expense life insurance is specifically designed to cover the cost of end-of-life expenses, like funeral arrangements, final medical bills, and unpaid debt. It offers a low level of coverage, usually up to $50,000, and has affordable premiums. You usually don’t need to take a medical exam for final expense insurance, but you do have to answer a few health questions on the application.
Difference Between Term and Permanent Life Insurance
There are several key differences between term life insurance and permanent life insurance:
- Coverage period: With term life insurance, you only get coverage for a certain amount of time that you choose. It can be anywhere from five to 30 years, depending on what your insurance company offers. With permanent coverage, your policy stays active until you pass away.
- Price: Term life insurance is usually going to be cheaper than permanent life insurance, because it offers a shorter period of coverage and a lower death benefit.
- Cash value: Permanent life insurance builds cash value, whereas term life insurance does not. That means you can borrow money from your permanent life policy like a personal loan, which you can’t do with a term life policy.
- Eligibility: Most of the time, you’ll have to take a medical exam in order to get permanent life insurance. Medical exams may not be necessary if you apply for term life insurance, especially if you are young and generally healthy.
- Death benefit: Term life insurance always has a guaranteed death benefit that doesn't change. On the other hand, some types of permanent life insurance have adjustable death benefits, which allow you to increase or decrease your coverage based on your life circumstances.
Which is Better (and when to choose either)?
Everyone has different life insurance needs. Therefore, the best type of life insurance will differ between individuals.
Generally speaking, if you’re young and healthy, purchasing term life insurance is a good option. It’s also the best option if you want an affordable premium. You can get term life coverage for a low rate, and if you choose a convertible policy, you can roll over your term life policy into a permanent policy without taking a medical exam.
On the other hand, permanent life insurance may be a better choice if you want coverage for your entire lifetime. Permanent coverage is also recommended if you want a policy that builds cash value and can be borrowed against like a loan. For some people, permanent life insurance makes sense if you want to diversify your investment portfolio with a universal life policy.