What is the Difference Between Term and Permanent Life Insurance?
Mid-summer is the time to take a break from your regular routine, enjoy quality time with your family, and take some time off for summer vacation. This is also a great time to look at your life insurance coverage. The Life Insurance and Market Research Association (LIMRA) reports that just under half all Americans have no life insurance at all, and that a majority of those who have life insurance obtain it through a group policy from their employer.
While having access to group life insurance coverage is a great benefit, this type of policy does not travel with you when you change jobs, so it is not an adequate replacement for an individual policy. Though many individuals know they need a policy of their own, they are often confused about whether they should buy permanent or term life insurance.
There are pros and cons to each type of policy, and the right life insurance product is always dependent on your individual needs. In a nutshell, here are the main differences between the two types of life insurance:
- Term life insurance costs less, is simpler and easier to understand, and has an expiration date.
- Permanent life insurance is more expensive than term, has several different variations, provides lifelong coverage, and can double as an investment vehicle.
Term Life Insurance in Detail
Term insurance policies are simple and straightforward. They provide a specified death benefit, and coverage is available for a specified period of time (term) as long as the premiums are paid. Typical terms (for these types of policies) are 10, 20, and 30 years. The longer the term, the higher the premium.
Group term policies through work are usually offered to all employees without a medical exam. Most individual term policies require an exam, and the results of the exam will determine whether or not you can qualify and how much your premium will be.
Term life insurance is best for individuals who need protection during a particular season of their lives. The most common use is for those with a family who want to provide insurance in case they die early. The policy should have enough coverage to pay off their existing debts (including the home mortgage), replace the income of the insured until the youngest child turns 18, and cover college tuition for the children.
The term should coincide with the number of years you have left to pay on your mortgage and/or the number of years until all your kids will reach adulthood. This way, the term will expire at the same time your family no longer needs the coverage.
Permanent Life Insurance Details
Permanent life coverage is more complicated and more expensive than term coverage, but has many benefits that term insurance does not have. Permanent insurance comes in many forms, including:
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
- Survivorship Life Insurance
Permanent life insurance does not have an expiration date, meaning it provides a lifelong death benefit as long as the policyholder pays the premiums. Permanent insurance also accumulates tax-deferred cash value, meaning you pay no taxes on the accumulated gains within the policy. Policyholders may borrow against the cash value, and if they decide they no longer need the policy, it can be cashed in at a later date.
Whole life insurance is the most common type of permanent life policy. Whole life policies provide a level premium, a guaranteed death benefit, and cash value that accumulates at a guaranteed rate. Premiums can be paid in a variety of ways depending on the insurer. Some offer payment options for a fixed number of years (e.g., 10, 15, 20), while others provide the option to pay a single upfront premium for the life of the policy.
Which Type of Life Insurance is Right for You?
Deciding between term and whole life insurance can be challenging, but working with a licensed insurance agent to determine your needs, will make this a simpler process. There are a number of factors to consider depending on your specific situation. Some of the most common factors include:
- Your budget;
- The amount of coverage you need;
- The number of years you will need the coverage;
- Whether you just want pure life insurance, or you want to use the policy as an investment and tax minimization vehicle as well.
Take some time this summer to analyze these and other factors to decide on the best individual life insurance to protect your loved ones. It is an investment you can’t afford to be without.