What’s the difference between term and permanent life insurance?

Term life insurance and permanent life insurance are two main types of life insurance policies, each with distinct features and benefits. Here’s a comparison of the key differences between them:

  1. Policy Duration:
  • Term Life Insurance: Provides coverage for a specific period, known as the “term.” Common term lengths are 10, 20, or 30 years. If the policyholder passes away during the term, the death benefit is paid out to the beneficiaries. However, if the policyholder outlives the term, the coverage expires, and there is no payout.
  • Permanent Life Insurance: Offers coverage for the entire lifetime of the insured, as long as the premiums are paid. It does not have a specific term, so the policy remains in force as long as the policyholder keeps paying the premiums.
  1. Death Benefit:
  • Term Life Insurance: Provides a death benefit to the beneficiaries only if the insured dies within the term of the policy.
  • Permanent Life Insurance: Guarantees a death benefit to the beneficiaries regardless of when the insured passes away, as long as the policy is active and the premiums are paid.
  1. Cash Value:
  • Term Life Insurance: Typically does not build cash value. It focuses solely on providing a death benefit.
  • Permanent Life Insurance: Includes a cash value component that grows over time. Part of the premiums paid goes into an investment or savings account, and this cash value can be accessed or borrowed against during the policyholder’s lifetime.
  1. Premiums:
  • Term Life Insurance: Generally has lower initial premiums compared to permanent life insurance, especially for younger applicants. However, premiums may increase if the policy is renewed after the initial term.
  • Permanent Life Insurance: Typically has higher initial premiums than term life insurance. The premiums are level throughout the policy’s lifetime, meaning they do not increase with age.
  1. Use of Policy:
  • Term Life Insurance: Often chosen to cover specific financial obligations or protect dependents during the years when financial responsibilities are highest, such as paying off a mortgage or funding a child’s education.
  • Permanent Life Insurance: Often used for long-term financial planning, estate planning, or leaving a legacy, as it provides coverage for life and builds cash value that can be utilized for various purposes.
  1. Flexibility:
  • Term Life Insurance: Provides straightforward coverage with limited flexibility for customization or adjustments during the term.
  • Permanent Life Insurance: Offers more flexibility in terms of adjusting coverage, accessing cash value, and potentially adjusting premium payments.

In summary, term life insurance offers affordable coverage for a specific period, while permanent life insurance provides lifelong coverage with a cash value component. The choice between the two depends on your financial goals, the duration of coverage needed, and your overall financial situation. Some individuals may even choose a combination of both types to meet their specific needs. Before making a decision, it’s essential to consider your personal circumstances and consult with a financial advisor or insurance professional for guidance.

Leave a Reply

Your email address will not be published. Required fields are marked *