Term vs. Permanent Life Insurance
Find out the differences between these types of insurance with our guide to term and permanent life insurance.
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Choosing a life insurance plan can be a difficult decision. Along with costs and benefits, people need to decide on the type of life coverage they will take out.
If you’re wondering about your life coverage options, you’ll probably want to know what plans are available to you and the advantages and disadvantages of each.
This article will tell you everything you need to know about term life coverage and permanent life insurance. We’ll go over the available options and help you figure out which type is right for you.
What Are Life Insurance Policies?
Life insurance policies or plans are contracts between a person and an insurer. These contracts guarantee that a specified amount of money will be paid to beneficiaries once the policyholder dies. This is known as a death benefit.
What Is a Death Benefit?
The death benefit is the amount of money paid to beneficiaries when a policyholder dies. This amount is detailed in the insurance contract you sign, and there are multiple coverage options.
In exchange, the policyholder pays the insurer a monthly or one-off premium for the contract to remain in force. If the policyholder stops paying premiums the contract will end, and the insurer will not payout in the event of death.
Life insurance policies can pay beneficiaries in different ways, and it’s essential to understand your options before signing a contract.
For example, beneficiaries may receive a lump sum, an annuity, or an account with funds depending on the contract.
How Can Life Insurance Plans Pay Out Death Benefits?
There are several ways policyholders can choose to pay out a death benefit to their assigned beneficiaries. Here are some of the more common methods:
Lump-Sum Payment: A death benefit paid in one amount to beneficiaries.
Installment Payments: A death benefit paid regularly over a period. For example, a policy with a death benefit of $500,000 could pay a beneficiary $50,000 ten times over five years.
Retained Asset Account: These are bank accounts that a beneficiary can usually access in the same way they would with a checking account.
The Types of Life Insurance
There are many life insurance policies in today’s market with different coverage, payment, and term lengths available for purchase.
In some cases, you can purchase life insurance that protects your family against accidental death or injury and are known as AD&D insurance plans.
There are also plans called final expense insurance or burial insurance, which covers the costs of burials and funerals for the policyholder.
Some insurers even offer life insurance for specific costs, debts, or expenses. One example is mortgage life insurance, which will cover the cost of an outstanding mortgage amount when the policyholder passes away.
However, the main types of life insurance policies people buy can be categorized into temporary life coverage (term life plans) or permanent life coverage.
What Is Term Life Insurance?
Term life insurance is a policy that covers a policyholder for a defined period. This means that a term life coverage plan will have a start date and an end date.
For example, a person could purchase a term life insurance plan with 30-year coverage. If they die during those thirty years, their beneficiaries will be able to collect the plan’s death benefit.
However, if the policyholder dies after the 30-year term the contract will have ended, and there will be no death benefit for their beneficiaries.
How Does Term Life Insurance Work?
Term life insurance plans work exactly the same as other life insurance policies. Before you sign the contract, you’ll have to figure out how long you would like to be covered and see if you can pay the premiums.
However, keep in mind that there are different types of term life policies that offer unique benefits. Let’s take a look at some term life insurance plans:
Decreasing Term Life Insurance
These are term life insurance plans that have a reducing face value over time. Decreasing term insurance is a great option to cover financial obligations that decrease as people go through life, such as a mortgage or college tuition.
For example, a young homeowner might take out a 30-year decreasing term life policy valued at $100,000 to cover their mortgage.
If the plan’s coverage depreciates at 10% each year, it will be worth $4710 after 30 years.
However, the homeowner will probably have paid a large portion of their mortgage by this stage, meaning they won’t need $100,000 in coverage.
In exchange, the monthly premiums on these types of plans are lower than other types of term or permanent life coverage.
Renewable Term Life Insurance
These are one-year term life insurance plans that increase in price as people age. The plan’s cost rises each year, while the payout amount stays the same.
A benefit of this type of term life plan is that policyholders don’t have to go through underwriting each year.
For example, a person may purchase a renewable term life insurance plan when they are 35, which will cost them around $500 annually.
If they would like to keep their life insurance for the next year when they are 36, their insurer will quote an adjusted price (for example, $510) to get the same coverage.
What Is Underwriting?
Underwriting is a process used by insurers to assess the risks of insuring a policyholder. Before you can sign a life insurance policy, your insurer will:
1) Go through your medical history.
2) Revise the answers you submitted in your life insurance application form.
3) Conduct a medical exam.
4) Check your driving history.
5) Calculate your risk of dying based on your lifestyle, family history, whether you smoke, and your occupation.
Convertible Term Life Insurance:
These are term life insurance plans that offer policyholders the option of converting their policy to a permanent life insurance plan.
In some cases, this is an excellent option because your policy would have built up value over your initial coverage period.
Term Life Insurance Pros and Cons
| Term Life Insurance Pros | Term Life Insurance Cons |
|---|---|
| Term coverage is generally more affordable than permanent life cover. | Policyholders may need to go through underwriting several times in their life. |
| Policyholders can take out term life insurance for specific financial responsibilities. | Once a contract ends, the policyholder will not have coverage. |
| People can customize their coverage, length, and other benefits. | You will have to pay premiums for your policy to remain active. |
| Some term life plans can be converted to permanent life cover. | These policies don’t accumulate cash value like permanent life insurance. |
| It may be challenging to qualify for term life coverage if you have health problems or chronic conditions. |
What Is Permanent Life Insurance?
Permanent life coverage is a life insurance policy that does not expire and stays in place for your entire life.
These life insurance contracts will only end if the policyholder stops paying their premiums or surrenders their policy.
What Does Surrendering a Life Insurance Policy Mean?
If a person decides to surrender their life insurance contract, they effectively cancel it.
If this happens, beneficiaries and the policyholder will not receive the policy’s death benefit. Instead, the insurer will pay the policyholder the surrender value of the plan.
For example, a person might have a life insurance contract worth $250,000. If they die while the contract is valid, their beneficiaries will receive $250,000 as a death benefit.
However, if they surrender their policy they will get a different amount. This is because the surrender value is not the same as the death benefit of a contract. It will usually be much less than the death benefit.
If they decide that they would like to end their contract at any point, the surrender value they will receive will be less than $250,000.
To learn more about this and other life insurance terms, speak with a consultant from PolicyScout to discuss your options if you’re considering surrendering your current life cover.
Permanent life plans are usually more expensive than term life insurance plans. Still, they can offer some benefits that term life insurance does not offer.
You will only have to go through underwriting once when you sign up with permanent life insurance.
If you are younger and in good health, getting coverage is easier. However, if you are older or have a chronic condition, you may pay higher premiums for permanent life cover.
What Is Underwriting?
Underwriting is a process used by insurers to assess the risks of insuring a policyholder. Before you can sign a life insurance policy, your insurer will:
1) Go through your medical history.
2) Revise the answers you submitted in your life insurance application form.
3) Conduct a medical exam.
4) Check your driving history.
5) Calculate your risk of dying based on your lifestyle, family history, whether you smoke, and your occupation.
Permanent life insurance policies also have a cash value component. These are living benefits that give policyholders an asset while they are alive. Policyholders can use their cash value to borrow money or pay for emergency expenses.
Death Benefit vs. Cash Value
A life insurance contract’s death benefit is the money beneficiaries receive if a policyholder dies. This amount is stated in your insurance agreement and is also called the face value.
The cash value component of the contract is a living benefit that policyholders can use while they are alive.
Policyholders build their contract’s cash value by paying additional money into their insurance plan, which grows as their policy matures.
For example, if a person has a $100,000 life insurance plan their death benefit might be $100,000, but the cash value component of the contract might be $35,000.
How Does Permanent Life Insurance Work?
Permanent insurance works similarly to term life plans and are contracts between an insurer and a policyholder.
However, the only difference is that these contracts are permanent coverage that remains in place for your entire life and don’t have an expiration date.
As long as the policyholder pays their permanent life insurance premiums, the contract will continue until they die.
Like term life insurance, there are also different types of permanent life coverage. Let’s take a look at some of the more popular permanent life insurance types:
Whole Life Insurance
Whole life insurance is sometimes called traditional life insurance. These plans have fixed premiums and guaranteed death benefits that will not change throughout a person’s lifetime.
For example, with a whole life insurance policy of $150,000 a person might be expected to pay $180 each month. The policyholder will have to pay this amount to keep their life coverage.
They won’t be able to reduce their premiums or change their death benefit amount if they run into financial hardship.
Whole life insurance plans also have a savings or cash value component. These allow policyholders to build up a cash amount in their policy, which they can use in different ways.
A policyholder can add additional money on top of their monthly premiums and build up a cash value for their policy. They can use this money to invest, borrow, or spend.
Universal Life Insurance
Universal life coverage is permanent insurance that offers more flexibility with payment terms, contract changes, and cash value benefits.
With a universal life insurance plan, policyholders can adjust their death benefit amount or how much they pay each month in premiums.
For example, a person might purchase universal life coverage in their 30s while married.
If they get a divorce later on and realize they won’t need as much life coverage, they can contact their insurer and lower their death benefit.
By doing this, they can keep their life coverage and any cash value they have built up over the years. They can also reduce their plan premiums and change their coverage to match their situation.
They can also change their payment terms and, in some cases, even use their policy’s cash value to cover their premiums for periods.
For example, a person who has seasonal work for six months of the year could pay their premiums during this period. Or if a person has built up enough money over their lifetime, they can use their cash value to pay their life insurance premiums when they retire.
Universal life insurance plans also have an investment savings or cash value component. These plans offer similar benefits as term life insurance, such as lower premiums than whole life cover.
If you’d like to learn more about these options, check out our article on universal life insurance plans.
Permanent Life Insurance Pros and Cons
| Permanent Life Insurance Pros | Permanent Life Insurance Cons |
|---|---|
| Policyholders only need to go through underwriting when they sign up. | They are more expensive than term life insurance. |
| Most permanent life insurance plans have a living benefit component, such as savings accounts or loan facilities. | Policyholders need to consider the long-term commitment of paying premiums throughout their lifetime. |
| Policyholders can borrow money against the cash value of their permanent life insurance policies. | Interest is charged on any loan taken out of permanent life insurance plans. |
| Policyholders can sometimes use their accrued cash value to pay for premiums. |
Should I Get Term Life or Permanent Life Insurance?
Both term and permanent coverage offer unique benefits but also have drawbacks. This can make choosing a plan challenging.
Here are some points to consider if you don’t know whether you should get permanent or term:
- Determine your financial obligations, responsibilities, and expenses
Consider your goals, age, and responsibilities when you choose a plan. Choosing life insurance depends on your overall goals in life and how much coverage you would like to buy.
Term insurance might be a good choice if you don’t have dependents, but you would like to cover your debts when you die.
However, permanent life insurance might be a good choice if you have significant financial responsibilities that will increase throughout your life.
- Think about what expenses you would like to cover
You’ll also have to consider the type of expenses you would like to cover. Think about whether the costs you owe will increase, decrease, or remain the same over time.
For example, if you are young and in a situation where you want to make sure that your family or loved ones are taken care of, permanent life insurance might be better.
If you are older or insuring your life because of debts that might change over time, you may want to consider term life cover.
For example, if you want to cover car payments and a mortgage, you’ll probably want term life insurance.
- Speak with a professional about your options
Reach out to a licensed insurance professional and ask them what your options are based on your answers above. Using a life insurance expert can save you time and make choosing a life insurance policy easier.
If you'd like to speak to a professional about term and permanent life insurance, reach out to PolicyScout at 1-888-912-2132 or help@policyscout.com.
What Are Some Alternatives To Term And Permanent Life Insurance?
There are other life cover options available to people. Here are a few different options that people interested in life coverage can look at:
Final Expense Life Insurance is one alternative. These plans have a smaller death benefit than term and permanent life insurance.
However, they are easier to get approval for, and beneficiaries can use the death benefit to cover anything, including burials, property transfer costs, or taxes.
Another popular form of life cover is burial life insurance which is a policy that specifically covers the costs of funeral services. These plans are usually more affordable and accessible than term or permanent life coverage.
If you’d like to learn more about these plans, feel free to contact one of PolicyScout’s agents on 1-888-912-2132 or help@policyscout.com to discuss your options.
Where Can I Learn More about Life Insurance?
If you’re interested in learning more about life insurance and your coverage options, we’ve got the latest information and articles to help you find a plan.
Our Life Insurance Hub has reviews, articles, how-to guides, and explainers that can help make the process of finding a great life insurance plan easier.
If you have specific questions about life insurance providers, term life coverage, or permanent life insurance, speak to a professional.
Contact our life insurance agents on 1-888-912-2132 or send an email to help@policyscout.com to get assistance.