Term vs. Permanent Life Insurance

There are a few key differences between term life insurance and permanent life insurance that are important to be aware of when deciding which coverage is right for you. The main difference between term life insurance and permanent life insurance can be illustrated by a few factors, including how the premiums, or your payments, are structured, how long each coverage lasts, and the benefits and features offered by each type of policy. In this article, we'll explore the difference between term vs. permanent life insurance in depth to help you determine which type of policy might work best for you or your loved ones.

When you're ready to get coverage, a local independent insurance agent can help you find it. They'll get you set up with either term life insurance or permanent life insurance, depending on your preferences and individual circumstances. Your agent can also help recommend which type of policy may serve you best. But until then, here's a breakdown of term vs. permanent life insurance and the major differences.

What Is Term Life Insurance?

Term life insurance provides a payout, also called the death benefit, to a designated beneficiary at the time of the insured's death. Typically, the death benefit is not subject to federal income tax. 

However, for the death benefit to be paid out to the beneficiary, the insured individual must pass away while the policy is still in force. By making continued premium payments on time for their coverage, the policyholder can keep their term life insurance policy active throughout the designated term.

A term life insurance policy covers the insured individual for a specified amount of time, referred to as the "term." This can be a set of 10, 20, or 30 years, the most commonly chosen term lengths. 

If the policyholder lives longer than their term life insurance policy's set term, their coverage will expire unless they opt to renew their policy for an additional term. However, it's important to note that not all term life insurance policies can be renewed. In many cases, though, it's possible to convert a term life insurance policy to a permanent life insurance policy within a specific time frame.

The average cost of term life insurance varies widely depending on the age and health status of the insured individual. For example, a healthy 20-year-old male can pay an average of $480 annually for a $1 million term life insurance policy with a 20-year term. A 30-year-old healthy female can pay an average of $348 annually for the same type of policy.

An ideal candidate for a term life insurance policy might be a younger applicant, such as a 20-year-old, looking for short-term coverage. This individual may be uncertain of how their life circumstances may change over the next few years because they are so young. The flexibility and lower cost of a term life policy may appeal to them more than a permanent life insurance policy does. Later in life, they may decide to convert their term life insurance policy to permanent life insurance if they have the option.

Types of Term Life Insurance

There are a few different options when it comes to term life insurance. Before you apply for coverage, take some time to review the differences between the term life insurance options you have. Understanding your needs and desires for your coverage can help you select the best policy for you. Here are the major types of term life insurance available:

• Annual renewable term life insurance: This type of term life insurance can be renewed annually, but the policy's premium rate increases upon each renewal. The benefit is that coverage is guaranteed, meaning the policyholder doesn't have to reapply for a policy every year. 
• Decreasing term life insurance: This type of term life insurance has a gradually decreasing death benefit throughout the length of the policy. Often, this type of coverage is chosen by individuals who are actively paying down a debt.
• Level term life insurance: This type of term life insurance remains consistent throughout the policy's term. If you bought a 30-year term life insurance policy, the premium and death benefit should stay the same throughout its entire duration, making level term life coverage an ideal choice for many customers.
• Return of premium term life insurance: This type of term life insurance offers a refund of all the premiums you paid into it should you outlive your policy's term period. As such, return of premium term life insurance tends to be more expensive than other options.

Term Life Insurance Cost

The average cost of term life insurance varies depending on many different factors. Some of the biggest factors that can influence the cost of term life insurance include the age, gender, and medical history of the applicant. A customer's height, weight, job, history of drug use, smoking status, and criminal record can also impact the cost of term life insurance. 

Term life insurance tends to be much more expensive for older applicants. In general, you can expect the cost of term life insurance to get more expensive as you get older. 

For example, if you apply for a term life insurance policy at age 70 vs. 30, you can pay 1,000% more for your coverage. Keep in mind, however, that longer-term life insurance policies aren't typically offered to applicants who are senior citizens.

Benefits and Drawbacks of Term Life Insurance

While term life insurance is a great option for many customers, it's not the right choice for everyone. Though term life insurance tends to be more affordable for many customers, the downside of not having permanent coverage may make this type of policy not worth it. Here are some of the biggest possible pros and cons of term life insurance.

Pros:	Cons:
Term life insurance tends to be more affordable than permanent life insurance.	If you need more coverage after your initial term life insurance policy expires, it may be much more expensive to renew it or get another type of policy.
The flexibility of term life insurance allows customers to buy coverage only for the period of their life in which they really need it, such as while actively paying off a mortgage.	Term life insurance doesn't accrue cash value like permanent life insurance does.
The lower cost of term life insurance can help allocate more funds to use for other purposes, such as education and homeownership.

What Is Permanent Life Insurance?

Permanent life insurance is a type of policy designed to last throughout the policyholder's lifetime. As such, permanent life insurance tends to be more expensive than term life insurance. 

Permanent life insurance also has a tax-free death benefit and an additional benefit of a cash value account which grows over the lifespan of the policy. The policyholder can use the cash value account for many things, such as taking out low-interest loans or creating supplemental retirement income. 

A permanent life insurance policy stays in force as long as the policyholder continues to make their premium payments. These premiums, in part, go toward building the policy's cash value. At any time, the policyholder can choose to surrender their policy for the cash it's built up.

Someone who might want to consider getting permanent life insurance could be an individual looking for life insurance that'll last their entire lifetime. This individual may not want to worry about renewing their policy at any point, such as after a term life policy expires. 

They may also want the flexibility of having the option to surrender the policy for cash at some point or to use the accrued cash value for other purposes. These are benefits a term life insurance policy can't offer.

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Types of Permanent Life Insurance

There are a few different kinds of permanent life insurance to choose from. Understanding the benefits and differences in each of these types of policies can help you make an informed decision about which is right for you. Here are the main options available for permanent life insurance policies:

• Whole life insurance: This type of permanent life insurance covers the policyholder for their entire lifetime as long as they continue to pay their premiums. This type of policy comes with a guaranteed cash value, guaranteed death benefit, and guaranteed premiums.
• Variable life insurance: This type of permanent life insurance comes with a higher investment risk but also the potential for higher gains on its accrued cash value. However, there's also a risk of greater losses for the policyholder. Variable life policies give customers the option to invest the accrued cash value in a menu of stock and bond funds. 
• Universal life insurance: This type of permanent life insurance allows policyholders to adjust their premium payments and death benefits, in many cases, within specified limits. As such, universal life insurance can be considered more flexible than other types of permanent life insurance. However, customers must understand that depending on the type of universal life insurance policy they choose (i.e., guaranteed, indexed, variable, etc.), their cash value's rate of return can vary, as do their options for investing. 
• Survivorship life insurance: These permanent life insurance policies offer coverage for two individuals. As such, the death benefit will be paid out to the chosen beneficiary after both insured individuals have passed away.
• Final expense/burial life insurance: This type of permanent life insurance is intended to provide funds to cover final expenses, such as a funeral and burial service. These policies are often purchased as small amounts of whole life insurance policies. Final expense or burial life insurance provides guaranteed acceptance with no medical exam for applicants. However, they tend to be quite expensive, considering the amount of coverage they provide.

Permanent Life Insurance Cost

Like term life insurance, the average cost of permanent life insurance can vary depending on the age, health status, and other factors of the applicant. However, a 30-year-old nonsmoker female of average height and weight who applies for a whole life insurance policy with $250,000 in coverage can expect to pay about $2,219 annually, on the low end. 

A 30-year-old nonsmoker male of average height and weight applying for the same policy can expect to pay about $2,536 per year on the low end. If both of these applicants applied for a universal life insurance policy, the female could expect to pay about $1,157 annually, while the male could expect to pay about $1,254 annually, each on the low end.

As with term life insurance, age and gender are two major factors that can influence the cost of permanent life insurance. The healthier and younger an applicant is, the less expensive a policy tends to be. The older you are when applying for permanent life insurance, the more expensive it can become. The same case applies to individuals whose health worsens over time.

Benefits and Drawbacks of Permanent Life Insurance

While permanent life insurance appeals to many individuals, it's not the right choice for everyone. Permanent life insurance can offer the convenience of having one policy throughout someone's entire life, which is appealing to some individuals. 

However, others might want the flexibility of changing their coverage at various stages of life. Here are some of the major potential pros and cons of permanent life insurance to consider.

Pros:	Cons:
Permanent/lifetime coverage: As the name implies, most forms of permanent life insurance offer the policyholder permanent coverage throughout their entire lifetime, as long as premiums continue to be paid.	Much higher cost: Permanent life insurance tends to be much more expensive than term life insurance, which can make these policies inaccessible for many customers.
Tax benefits: Permanent life insurance not only offers a tax-free death benefit payout, but also tax-free life insurance policy loans and tax-deferred growth on the policy's cash value.	Possible coverage lapses: If the policyholder misses a premium payment, it may cause the policy to lapse with no death benefit or cash value.
Cash value: Permanent life insurance policies accrue a cash value over time, unlike term life insurance, and these funds may be used by the policyholder at any time during their life.

Comparing Permanent Life Insurance vs. Term Life Insurance

When considering choosing permanent life insurance vs. term life insurance, it's helpful to understand the major differences in each type of coverage. Both permanent life insurance and term life insurance have different benefits, coverage periods, and costs. In the table below, we've broken down some of the key differences in term vs. permanent life insurance to help make your decision easier.

Term vs. Permanent Life Insurance

Term vs. Permanent Life Insurance: Which One Is Right for You?

While having life insurance can be beneficial for many people, deciding on the right kind of coverage is an individual decision. When weighing your options and deciding between term vs. permanent life insurance, it can be helpful to understand when each type of coverage is selected by many customers. The chart below breaks down when selecting either term life insurance or permanent life insurance makes sense for most individuals.

Get Help Choosing the Best Life Insurance Policy for You

Choosing between term life insurance and permanent life insurance is an important decision, which makes having the help of a trusted expert even more beneficial. A local independent insurance agent specializing in life insurance can help you weigh your options and recommend the ideal type of coverage for your unique circumstances and needs. Independent insurance agents can shop and compare life insurance policies from many different carriers, helping you find the best overall blend of coverage and cost.