At the start of their decision-making process, many life insurance buyers are confronted with a major decision: Term vs Permanent Life Insurance?
For years, people have been debating whether to buy term vs permanent life insurance. We dissect them both so you can make an informed decision about which type of insurance is right for you.
Term life insurance is typically less expensive and provides coverage for a set number of years, whereas permanent life insurance is typically more expensive and remains in effect until you die, as long as your premiums are paid. You may want to research the features of each type to determine which policy is best for you and your family.
Basics of Term vs Permanent Life
Consider getting term life insurance for:
- Death benefit insurance with no cash value accumulation.
- Life insurance on a low budget
- Ability to convert to long-term life insurance.
Consider purchasing permanent life insurance for:
- Long-term death benefit protection
- Cash value accumulation that is stable.
- The possibility of receiving dividends.
Both term and whole life insurance policies provide guarantees: premiums will not change, and the death benefit amount paid to beneficiaries will not change.
The main distinctions are in the length of coverage and the cash value. Term life insurance has no cash value and you could outlive the policy. Whole life insurance provides both cash value and lifelong coverage, albeit at a high cost.
Term Life Insurance vs. Whole Life Insurance
Premiums stay the same
The most common types of term life and whole life insurance have level premiums. That means your premium payments will remain constant over time, and you’ll always know how much you owe. Payment plans such as monthly, quarterly, semi-annually, and annually are commonly offered by life insurance companies.
If lifelong bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payments, such as single-premium whole life insurance, or policies with payments for a set number of years, such as ten years. This gives you more budget flexibility later in life.
Term life insurance does not accrue cash value. Whole life insurance policies include a cash value account that accumulates over time at a fixed interest rate. One of the reasons whole life insurance is significantly more expensive than term life insurance is the guaranteed cash value growth.
The policyholder is supposed to use the cash value. You can use it to get a loan and pay for whatever you want. If you die without repaying it, the amount owed is deducted from your death benefit.
When you die, any remaining cash value usually reverts to the insurance company. Your beneficiaries receive the face value of the policy less any cash value withdrawals that were not repaid.
Consider guaranteed universal life insurance if you want lifelong coverage without the high cost of a whole life insurance policy.
The payouts on whole life and term life policies, known as death benefits, are guaranteed and do not change. In most cases, your beneficiaries will receive a tax-free death benefit.
The main distinction here is that there is no payout if you outlive a term life policy. You can usually renew a term life policy at a higher cost after the period of level premiums expires. However, if you do not renew, your policy will expire and your coverage will end. As long as you’ve paid your premiums, whole life insurance will pay out regardless of when you die.
Any price comparison of term vs. whole life insurance will be only marginally useful because whole life insurance provides lifelong coverage as well as cash value.
While the premiums for permanent life insurance are much higher than those for term insurance, many people have earned enough money by that point in their lives to be able to afford such policies. With the additional savings opportunity, they can also use it as a tax-advantaged investment vehicle to cover the needs of lifelong dependents or for estate planning.
Ending a policy
While you do your best to anticipate financial needs many years in the future, you may discover that you no longer require life insurance. With term life insurance, you can stop making payments and cancel the policy. There is no money to walk away with because there is no cash value.
If you want to cancel a whole life insurance policy, simply stop making payments. The life insurer will most likely use any cash value to continue paying your premiums until the cash value is depleted. Rather than walking away, contact the insurer and request the surrender value, which is the cash value less any surrender charge.
Is it possible for me to change my mind and switch?
While the goal is to have paid off most debt and other financial obligations by that time, as well as accumulate enough savings to make a large amount of life insurance unnecessary, some people may find that they’d prefer ongoing coverage and savings opportunities, and thus may want to purchase a new permanent policy.
As a result, many term life policies include the option to convert to permanent policies later, often without the need to retake medical exams or otherwise qualify. A feature like this could make the conversion appealing for someone who has medical issues that would make a new policy prohibitively expensive, or who has chronic conditions that necessitate ongoing expenses that could be deducted from the savings portion.