Insurance is often a topic that puts people to sleep. When having to decide what type of policy to apply for, how long should the coverage last, etc., it can be an overwhelming decision. In this article, I will outline the differences between two of the oldest types of life insurance: term insurance and permanent insurance. Here’s a breakdown of the basic differences between the two, so that you can make an informed decision.
A term insurance policy, as the name implies, is an insurance policy that covers you for a set period, usually between fifteen to thirty years. If you die within this period, your beneficiaries get a pay-out. But if you outlive the insurance term, your beneficiaries don’t get anything. With a permanent insurance policy, it covers you for the rest of your life as long as you pay your premiums. It pays out regardless of how long you live and when you die.
Key Difference Between Term Insurance and Permanent Insurance
In deciding which insurance policy is right for you, you should know the major difference between the two. Here are some key differences between term insurance and permanent insurance.
• Coverage Length: Term life insurance provides you cover for a set period, for example, 15 - 30 years. On the other hand, permanent life insurance provides coverage for the entire duration of the buyer’s life, as long as the premium is being paid.
• Premium: For term life insurance, the premium cost is usually cheaper compared to that of permanent life insurance. For permanent life insurance, the premium might be higher than that of term life insurance, but it stays the same over lifetime.
• Cash Value: Most types of permanent insurance include a cash value component; the longer you pay into your policy, the higher its cash value grows. You have the option of cashing in or borrowing against your permanent life insurance policy. On the other hand, term insurance does not have a cash value.
Pros and Cons of Term Life Insurance
Pros • Term life insurance covers you for a set amount of time. It's also less expensive than permanent life insurance, which builds up cash value and offers additional advantages.
• Term life insurance can be converted to permanent life insurance. You can acquire the coverage you need right now, with the option to upgrade to permanent coverage later.
• One of the benefits of term insurance is its simplicity. Term life insurance is a simple life insurance policy that focuses on providing a pay-out to your beneficiaries in the event of your death. All you have to do is make sure that the premium is paid on time. Many carriers do offer a grace period of 30 days should you miss paying a premium payment on time.
Cons • The premium is determined by several factors including whether you smoke or do not smoke, your age, and any pre-existing health conditions you may have.
• It provides coverage for a finite period of time. If you outlive your insurance term without renewing it, your beneficiaries will not get a payout when you die.
• If you end up needing to convert the policy to a permanent policy, the long-term cost of term life insurance might be costly because of increased premiums at the expiration of the term period.
• Term life insurance policy does not accumulate any cash value.
Pros and Cons of Permanent Life Insurance
Pros • It comes with tax benefits. For one, permanent life insurance policies provide a tax-deferred cash value. Also, there are no income taxes if you earn dividends or relinquish your coverage unless the amount you receive is larger than the amount you paid in premiums.
• Permanent life insurance can last your entire life as long as you keep paying the premium. A term policy, on the other hand, lasts for a set number of years, after which you'll need to replace it if you still require coverage. And due to your age or health conditions, you may have more difficulty getting it at a reasonable price.
• Your premiums and death benefit remain the same with permanent life insurance.
• After a while, policyholders can borrow against the cash value of their policies. And, unlike other types of loans, individuals are not obligated to repay the money if they are unable to do so. However, if they die before paying it back, the policy's death benefit would be decreased accordingly.
Cons • Permanent life insurance premiums are much higher than term life insurance premiums because the insurer guarantees the payment of a death benefit to your beneficiaries as long as all premiums are paid.
• The cash value portion of permanent life coverage is invested by the insurance company in any way it sees fit. Which means you don’t have control over what it is invested in.
• Your insurance may be canceled if you skip a payment or can no longer afford to make payments. If your policy gets canceled, you may have to get a new one, which means you'd be starting over – and possibly paying a higher premium.
How To Decide Which Is Right For You
The good news with both term and permanent policies is that the death benefit is tax free to the beneficiaries. There is however certainly a hassle factor when applying for an insurance policy as a medical exam may be required to qualify. Here are a few factors to consider when deciding on what type of life insurance to buy.
Age The younger you are when you get a life insurance policy, the lower your annual premiums will be. Good health also correlates to cheaper insurance premiums and purchasing coverage when you're younger will save you money in the long run. Typically, term insurance makes sense for younger folks who need a policy to cover them while their kids are young and still at home.
Estate Planning You can leave a permanent life insurance policy to your loved ones to help pay estate taxes. Since the death benefits are usually tax-free, they can be tremendous tools to use to help heirs and potential tax bills. If you are concerned about estate planning and estate taxes, you should consider permanent life insurance.
Provision For Dependents If you have family members that are financially dependent on you and you want to make sure that they are well catered for, even after your passing, you should consider permanent life insurance.
Affordability If cost is a consideration, term life insurance is much less expensive than permanent life insurance. As a result, it is the most popular option and the best fit for the majority of families.
Both term life insurance and permanent life insurance have their advantages and disadvantages. The deciding factor is your personal need and preference. List what you need your life insurance for and see which one will work for you. If you need any help with determine what type of policy you need or how much you should apply for, please reach out to us and we can help.
Written by Matthew Delaney