Life insurance can be a huge financial relief for those that lose a loved one and need to pay not only the funeral costs, but all of the other day-to-day bills like the mortgage, the credit cards, or the car payment. Or, you may even be thinking ahead about your children’s college tuition, which can also be paid for with life insurance.
If you’ve been thinking about purchasing a life insurance policy, you’ve probably noticed that there are two main kinds of life insurance: term and permanent.
Term Life Insurance
The biggest advantage of term life insurance is how affordable it is.
There is less risk for an insurer because the term coverage is temporary. And the younger and healthier you are, the better rate you’ll receive.
Term life insurance rates are fixed when you buy the policy. You don’t need to worry about the insurer raising prices because of age or a health issue.
With term insurance, you choose how much coverage to buy and how long you want the policy to last.
Your coverage can last 10-40 years. However, your age can limit term length options. For example, a 60-year-old will not qualify for a 40-year term policy.
A longer term will mean a higher premium. A higher face amount (a.k.a. coverage amount) will also mean a higher premium. However, it’s easy to customize a policy in order to fit into most budgets.
When your term ends, your coverage ends. Policies often have terms available for 10 – 40 years.
Term insurance is designed to protect your dependents in the event you die prematurely. If you die within the term, your beneficiaries receive the death benefit. If you don’t die, there is no payout.
Term life insurance is great for those that want to financially protect their loved ones for a certain period of time when you feel your family would experience the most financial devastation if you were to die. The payout replaces your income and can help your family pay for expenses that you currently take care of and even future expenses such as college tuition.
Ideally, your need for term life insurance would end when the term expires. Once your children are grown and on their own and you’re nearing retirement, you no longer need term insurance protection.
» Compare: Term life insurance quotes
What happens at the end of the term?
Term life insurance is not permanent. The coverage ends when the term you chose is complete. However, if you decide you still want coverage, you may have some options.
Many term policies come with conversion and renewability options. Converting means you change your term policy into a permanent policy. Renewing means you continue your same term coverage for another year.
Your price will increase if you continue coverage.
If you decide to renew your policy at the end of your term, your premiums will be much higher. But the insurance company won’t require you to prove you’re still healthy, so this option is ideal if you find yourself terminally ill.
Instead of renewing the same term coverage another year, you may decide to go with a term conversion instead. A term conversion is when all or some of your term life insurance policy is converted into a permanent life insurance policy.
Most term policies allow you to convert to a permanent policy regardless of your health as long as you do so before the deadline on your current policy. Like renewability rates however, your conversion rates will be much higher than your initial term rates because you’re changing the type of policy you own. Instead of a temporary term policy, you’re converting to a permanent policy that will last the remainder of your life.
For those who perhaps would benefit from permanent life insurance but cannot currently afford the premiums, guaranteed conversion can offer protection along with the ability to secure needed coverage down the road, even if you become physically impaired or otherwise difficult to insure.
See what you’d pay for life insurance
Permanent Life Insurance
Permanent life insurance is a bit more complicated than term life insurance and is offered through a variety of life insurance products. We’ll discuss the most common type of permanent life insurance: whole life insurance.
As a result of having lifelong coverage, you have higher premiums than term insurance. As long as you continue to pay your premium payments, you’ll have your permanent life policy until you die.
Premiums Won’t Increase
With whole life insurance products, the premiums remain the same throughout the entire policy. The policy is structured to be lifelong, and as long as you maintain the premium payments, the policy will be in force regardless of age and health conditions.
Protection Is Lifelong
While term insurance offers protection for a specified period of time, whole life insurance offers lifelong coverage.
Accumulates Cash Value
As you pay your premiums, your policy accumulates cash value. The value grows slowly and is tax deferred, so you don’t pay taxes on it while it’s accumulating.
You can access this cash value account while alive through loans and withdrawals. The cash value can be used during life to provide funds to help pay for college tuition, supplement retirement income, take advantage of business opportunities, or cover emergencies. You can access these funds for whatever reason you want.
Taking out loans and withdrawals will reduce the death benefit by an equal amount. In addition, policy loans accumulate interest until the balance is paid. You are not required to pay back the loan while you’re alive. But the insurance company will get what they are owed upon your death before paying any remaining death benefit to your beneficiaries.
Some permanent life insurance policies also earn dividends. Dividends are usually paid out annually by the insurance company. You have options as to how you prefer to receive and use these dividends for your whole life insurance policy. For example, dividends can be received as cash or used to overpay premiums so your policy is paid-up faster.
» Learn more: The Types of Permanent Life Insurance
Which is better: Term or Whole Life Insurance?
Both types of insurance have their benefits. It’s a personal decision on what type you choose. Your age, financial situation, and lifestyle factors into your decision.
Term life is great when:
- You only need life insurance to cover a specific period of time.
- You want the most affordable coverage.
- You are unsure and may want permanent coverage in the future. Most term policies can be converted into permanent coverage. Deadlines for conversions vary by policy, so if you have a term policy, it’s good to review it.
Consider permanent life if:
- You plan on spending your retirement savings, but still want to leave a legacy or money for final expenses.
- You need to create inheritance equalization. Perhaps you have land or a business that you plan on leaving to one child, you can provide a fair inheritance to your other children using life insurance.
- You have a loved one who will depend on you their entire life, a child with special needs, for example.
- If you have a very large estate that you will be leaving behind, you may want to provide life insurance to help your heirs pay estate taxes. Without a life insurance payout, parts of your estate may need to be sold off to pay taxes.
» Learn more: Is Term Better Than Whole Life Insurance?
Cost Difference Between Term and Whole Life
For the same amount of coverage, whole life is about 10 times more expensive than term. Consider the monthly quotes below. The applicant is a healthy non-smoking man.
|20-Year Term Policy||Age 30||Age 40||Age 50|
|Whole Life Policy||Age 30||Age 40||Age 50|
Most families need a large amount of protection during their earning years, but not as much as they reach retirement.
Your large needs, like your mortgage and children’s education, are not obligations that last forever. Term life insurance is ideal to protect the temporary big ticket items.
Whole life coverage, on the other hand, is lifelong but you shouldn’t need as much. A $500,000 term policy is common. A $500,000 whole life policy is not common for the average family. It’s simply not affordable long term.
Not all families need whole life insurance, but if you do, sometimes a combination of term and permanent insurance is the best solution. Buy a large amount of term life insurance to cover your family’s most financially vulnerable years, and supplement it with a small permanent policy. This is a more affordable strategy.
You may have heard the phrase “buy term and invest the rest.” This strategy is often the best route for families due to how complex and expensive permanent policies can be.
It’s easy to run quotes on Quotacy.com. If you’re curious about pricing, go ahead and play around with our term life insurance quoting tool without giving away any personal information.
If you’re curious about permanent life insurance, we have staff with years of experiencing putting permanent products in force as well.
Watch The Differences Between Term and Permanent Life Insurance Video
About the writer
Natasha Cornelius, CLU
Senior Editor and Licensed Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.