Once you have decided to purchase life insurance, an important decision awaits you—choosing between term vs. permanent life insurance.
While these two options share certain features, they each have characteristics that appeal to people for different reasons, such as duration, cost and cash value. To make the right choice for you, it's important to understand the benefits of each type of life insurance.
In this article, we'll cover:
The differences of term vs permanent life insurance at a glance How the length of coverage compares The cost differences How cash value in permanent policies works Converting term to permanent insurance
Defining term vs. permanent life insurance
Types of life insurance
Term
- Fixed coverage period
- Fixed premiums during the term period
- May be renewable or convertible
- Does not have cash value
- Provides a death benefit to give beneficiaries financial support1
Permanent
- Lifetime coverage1
- Flexible premiums (on some products)
- Potentially provides cash value growth
- Potentially earns dividends
- Provides a death benefit to give beneficiaries financial support1
Term
- Fixed coverage period
- Fixed premiums during the term period
- May be renewable or convertible
- Does not have cash value
- Provides a death benefit to give beneficiaries financial support1
Permanent
- Lifetime coverage1
- Flexible premiums (on some products)
- Potentially provides cash value growth
- Potentially earns dividends
- Provides a death benefit to give beneficiaries financial support1
How long do you need life insurance coverage for?
Term life insurance provides coverage for a set time period
The defining attribute of term life insurance is that it's only active for a
When your original term ends, you would have to get a new term life insurance contract to continue your coverage. A common concern is that as you get older, you generally have to pay more for the same amount of insurance. It's likely a new term contract would cost more, and it's possible for you to be denied coverage altogether if you developed any significant medical issues in the meantime.
Permanent life insurance is designed to last a lifetime
This type of policy has no expiration date or need for renewal. These contracts are designed to last a lifetime as long as the policy remains in force. Whole Life, a type of permanent life insurance, offers guaranteed coverage for a lifetime and premiums that won't increase even if your health status changes.
Comparing premiums: Term vs. permanent insurance
Term life insurance is the most affordable type of life insurance
Because term life insurance involves a limited coverage period, it's
Permanent life insurance costs more than term insurance due to the additional features
The premiums for permanent life insurance tend to be much more expensive than term life insurance with the same death benefit. The tradeoff is that it lasts longer and you won't have to worry about your premiums increasing as you age or your health changes. Permanent life insurance also costs more because a portion of your premium helps fund your cash value.
Cash value: A benefit of permanent life insurance
When you purchase a permanent life policy, part of your premium payment funds the policy's death benefit, and another part helps build
This cash balance can be used for anything, including covering major expenses, such as college tuition or income during retirement. Permanent life insurance cash value grows on a tax-deferred basis, and your
With a whole or universal permanent life insurance contract, the insurer pays interest on the cash value based on current market rates. Some contracts also provide a
Generally, you can access your cash value balance in these ways:
- Withdrawal. You take money from the cash balance.
- Loan. You borrow money from the cash balance with the intent to repay.2
- Surrender. You receive the entire cash balance, but the policy is no longer in effect.
- Premium payments. You use the cash balance to pay for the contract.
Keep in mind that
Converting term life insurance to permanent life insurance
The relative affordability of term insurance makes it a popular choice for many people who may not be able to afford permanent life insurance. If your term covers your family during its most important stages—for example, before your children graduate from college—that may be all the protection you need.
But if you need a longer coverage period than your original term, many term life insurance products have
That said, your premium likely will increase when you convert because you're getting lifelong protection and the benefits of cash value accumulation. The increase in price will be based on a number of factors, including:
- Your age when you convert
- How much of your original policy you convert
- The type of permanent life insurance you choose
Most life insurance carriers require you to perform a term-to-permanent conversion within a few years of your policy becoming active, so it's critical to be aware of when that window closes. Some policies may allow you to purchase extended-term conversion protection as a rider.
Get help choosing the type of life insurance right for you
Ultimately, the choice between term and permanent life insurance comes down to your financial needs and budget. If you're looking for the most affordable way to
However, you may want to consider permanent life insurance if you're seeking a longer-lasting policy with a cash value component that grows over time. These policies can help cover a wide range of financial needs during your lifetime, from covering unexpected medical bills or a child's college tuition to supplementing your retirement income.
If you're not sure which type of insurance product best suits your needs,