Term Versus Permanent Life Insurance: Which Should I Choose?
When deciding on life insurance coverage, you need to consider premium costs, investment options, and how long you want your coverage to last.
When shopping for a life insurance policy, it’s all too easy to get bombarded with different terms and concepts. So many options can lead to confusion and confusion is exactly what you don’t want when searching for life insurance.
Life insurance policies are not all the same, but this is honestly a good thing— everyone has different needs. Your choice will depend on a few factors, namely the amount of coverage you need, the length of time you need it for, and how much you can afford to pay.
It’s crucial that you understand the differences between the two major types of life insurance policies, and how they can affect you and your loved ones. Your life insurance is a huge decision, so it’s vital that your choice is well-informed.
Term Life Insurance or Permanent Life Insurance?
Life insurance policies are grouped into two camps: Term and Permanent. Let’s clarify the difference between the two.
Term Life Insurance
Term insurance is a policy that provides coverage for a set period of time. This period of time is the “term”, and it’s typically five, ten, 20, or 30 years. If the insured dies within the term, the death benefit will be paid. Once the term expires, it must be renewed if you want to continue your coverage. You can also generally convert your policy into permanent life insurance.
Term insurance, unlike most types of permanent insurance, has no cash value. This means that the death benefit is the only guaranteed value of the policy, and you cannot get any money back unless you opted in to include a return of premium rider. This opt-in option will increase the cost of your coverage.
Term life insurance can also be used to cover a mortgage. Your home may be your family’s greatest asset. If you pass, you don’t want the burden of a mortgage payment over their heads. The policy will pay out a tax-free benefit to the beneficiary of your choice, which can be used to pay off the mortgage and more. While conventional lenders will offer mortgage insurance, a life insurance policy is superior because the beneficiary will have the freedom to use the money as they please.
When compared against permanent insurance, term insurance is pretty straightforward. Term policies are typically much less expensive than other policies. Some insurers offer level premiums, while others offer graduated premiums. Level premiums remain the same price for the entire term, while graduated premiums increase over time.
Read: An In-Depth Guide to Term Life Insurance
Permanent Life Insurance
As its name implies, permanent life insurance provides coverage for the entire life of the insured. Permanent insurance is a bit more complex than term insurance and is usually more expensive, but it does offer more options.
Unlike term insurance, permanent insurance has a cash value. This is important if you want an additional investment vehicle or savings vehicle. The policyholder can borrow funds against the cash value, and can even withdraw funds from it.
There are two primary types of permanent life insurance: whole life and universal life.
Whole life insurance provides coverage for the full lifetime of the insured and its savings increase on a guaranteed rate. The premiums on a whole life policy are fixed, meaning they remain the same for the entire length of the coverage.
Read: An In-Depth Guide to Term Life Insurance
You can build the policy’s savings component by paying more than the scheduled premium. This savings component can be invested, can be borrowed against, and can be withdrawn upon request. Upon the death of the insured, the beneficiary receives the cash benefit, while the cash value returns to the insurer.
Universal life insurance is attached to an interest-bearing account. The premiums for universal life are typically lower than whole life policies, and the premiums can be adjusted. Universal life policyholders can borrow against the cash value without tax implications.
Which Should I Choose?
It all depends on your needs. Term life insurance is great for those who want a simple policy with low premiums. But the policy will likely expire before the end of the policyholder’s life. While lower premiums are great, some people will prefer to have ongoing coverage with no interruption. Term life insurance may not provide peace of mind in that aspect.
Permanent life insurance will last the entire lifetime of the insured (as long as you pay the premiums), and it can be used as a savings and investment vehicle. Yes, the options are more complex, but they’re also more robust. Being covered for the remainder of your life provides peace of mind for you and your loved ones. Having an additional cash value that can be borrowed against is powerful.
Read: Insurance as an Investment? It's Called Permanent Life Insurance
Policy Loans: Another Consideration
Many people consider a life insurance policy loan to be superior to a loan from a conventional bank. Here are a few reasons why:
- If you have enough cash value, you can borrow with no questions asked.
- Unlike credit card debt, insurance policy loans won’t show up on your credit report.
- There’s no credit check, nor is there an application form to fill out.
- The interest rates on insurance policy loans are typically lower than bank loans or credit cards.
- There’s no timetable for repayment. In fact, you don’t need to repay the loan. But if you don’t repay, the owed amount is deducted from the policy death benefit.
There are a few things you need to consider if you are going to take out a loan against the cash value, though:
- You will pay interest on a policy loan. It’s typically less than the conventional bank loan, but it’s still something to keep in mind.
- If the loan plus interest exceeds the policy’s cash value, the policy could lapse.
- The death benefit will be reduced if you do not pay back the loan.
Read: Direct Recognition Life Insurance vs Non-Direct: Which is Better?
Term life insurance versus permanent life insurance is really a discussion of inexpensive and straightforward vs. complex and robust.
If you cannot afford high monthly premiums and simply want to ensure your family is taken care of in the event of your death, term insurance may be the choice.
On the other hand, if you want a savings vehicle that can be used in a variety of financial scenarios, a whole life or universal permanent insurance policy may be the right move.
Find Out Now: Get a Life Insurance Quote Online
This article was brought to you by The ReFrame Group. As a certified B-Corp, The ReFrame Group is dedicated to helping clients comprehend hard-to-understand policies, make well-informed decisions, and find the policy that will protect them for tomorrow. For more information and insurance resources, please visit ReFrame Insurance.
Written by Aaron Moser
Aaron is a qualified associate financial planner (QAFP) with ten years of experience working with individuals and business owners, nine with Freedom 55 Financial and one with The ReFrame Group.