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Term vs. Permanent Insurance: Understanding the Key Differences

Term and permanent life insurance policies offer distinct features to cover individual needs and circumstances. Term life insurance lasts a specific amount of time or until the insured reaches a certain age and is less expensive than permanent policies. Permanent policies last the insured's lifetime and have savings and investment features. Both types of policies are designed to provide coverage to protect the efforts of your life financially.

Key takeaways:

Life insurance is a tool used to protect the legacies we create in our everyday lives. Car insurance financially protects the people under the roof of the insured vehicle and those on the road. Life insurance financially protects people and productivity, which makes the road worth traveling. Because different people build various things, life insurance policies offer multiple features and two main types of policies: term life insurance and permanent life insurance. The main differences between these two types of policies are the length of the contract, cost of premiums, and investment options.

Term and permanent life insurance explained

Life insurance policies offer multiple features. There are two main types of policies: term life insurance and permanent life insurance. The difference between term and permanent life insurance are the length of the contract, cost of premiums, and investment options.

  • Term Life insurance. Less expensive than permanent life insurance, term life offers coverage for a specified time. If the policy owner passes away within the term, the face amount of the policy is paid to the beneficiaries. If the policyholder outlives the term, it expires without a benefit. Most term life insurance policies are renewable with a modest premium increase.
  • Permanent Life insurance. Coverage is designed to last for the life of the insured. Also called whole life, traditional policies have a level premium and death benefit. Permanent life insurance policies offer an investment feature on premiums called cash value. As your policy matures, interest grows on the premiums you pay. Policyholders can withdraw from cash value or take a loan against it with the insurer.

Both permanent and term life insurance policies will pay a benefit in the event of the insured's passing. Beneficiaries of the policies can use the funds to cover end-of-life expenses, pay off a mortgage and debts, and financially protect the accomplishments you leave behind, like your business.

Term vs. permanent life insurance: the main differences

When reviewing permanent life insurance vs term life insurance, the most significant distinctions are how long the contracts last, the cost of premiums, and the investment features.

Term life insurance lasts for a term, usually in increments of five years or until the insured reaches a certain age. If the policy expires before paying out, most policies can be renewed with a modest premium increase without proving insurability.

Permanent life insurance, also called whole life insurance, lasts the insured's lifetime, usually until age 120. Permanent life insurance premiums are more expensive than term life premiums for two reasons: the duration of the contract and the cash value feature.

A traditional whole life insurance policy's premiums remain the same for the duration of the contract and have a guaranteed death benefit. Permanent life insurance also develops interest on the premiums paid, called cash value. A traditional whole-life policy grows cash value at a guaranteed rate. How cash value is invested and grows separates traditional whole life insurance policies from other types of permanent life insurance.

Type of policyCash valuePremiumsDuration of policyDeath benefitLiving benefits
Term life insuranceNo cash value.Less expensive than permanent polices.Usually issued in increments of five years.Guaranteed death benefit.No living benefits, riders provide additional coverage.
Traditional whole life insuranceCash value is credited as premiums are paid.More expensive than term policies.The lifetime of the insured or typically to age 120.Traditional policies have a guaranteed death benefit. Outstanding loans decrease the amount.Policyholders can withdraw or take out loans against cash value.

Types of permanent life insurance

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Since permanent life insurance accumulates cash value, some permanent life insurance products offer adjustable coverage. With specific policies, policy owners can adjust the premiums, the benefit amount, and the interest rate.

Policyholders withdraw from cash value or take out loans, in which the insurer uses the cash value as collateral. The death benefit will decrease if the insured passes away before repaying the loan.

  • Traditional whole life. The most basic form of permanent life insurance, traditional whole life offers level premiums, a guaranteed interest rate, and a guaranteed death benefit.
  • Universal life insurance. Policy owners of a universal life insurance policy may increase, reduce, or eliminate premiums by covering the cost with the policy's cash value. Insurers guarantee a minimum monthly interest credit but may accumulate more interest when market conditions allow. Policy owners may also raise the death benefit, subject to insurability, or decrease it with or without a premium change.
  • Variable life insurance. A variable life insurance policy is a security because the cash value is tied to stocks or bonds. Premiums are invested in subaccounts that the policyholder can choose from and own. The insurer guarantees a minimum death benefit and fixed premiums; however, the death benefit and cash value change with market conditions.
  • Variable Universal Life Insurance (VUL). These policies combine features of variable and universal life insurance. Like variable life, the policy's cash value is invested in subaccounts and changes according to market performance. For this reason, it is also a securities product. Policy owners of VUL insurance can increase, decrease, or stop premium payments like a universal life policy as long as the cash value can cover the expenses.
  • Equity-indexed life insurance. An equity-indexed life insurance policy ties cash value to an equity index like the S&P 500. These policies have the potential for a greater rate of return; however, most insurers offer a minimum interest rate. Premiums may be flexible or fixed.

Types of term life insurance

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Term life insurance policies are solely death benefits, they do not grow cash value. If the insured dies during the term, the face amount of the policy is paid to the policy's beneficiaries. If the insured survives the policy term, the policy terminates without paying a benefit. Consumers can purchase a return of premium rider to have all or a portion of their premiums returned if they outlive the term policy.

There are three basic types of term life coverage: level, decreasing, and increasing. Consumers may also purchase term life riders to add living benefits, additional coverage, and more to an existing base policy.

  • Level term. The most popular form of term life insurance, level term, offers level premiums and a level death benefit for the term. Features may include renewability and convertibility. Convertibility allows the policyholder to convert the policy to a permanent policy, usually by a specified age.
  • Decreasing term. A decreasing term life policy covers things that fall in value over time, such as a mortgage or debt. As the loan or debt amount decreases, so do the policy premiums until the amount is paid off.
  • Increasing term. Increasing term policies are most commonly attained as a term life rider to cover the cost of living as it grows over time. These riders allow the policyholder to increase the death benefit to fight inflation.
  • Term life riders. Term life riders are purchased to add additional coverage and living benefits to the existing life insurance contract. A family term rider is an alternative to an additional life insurance policy to cover a spouse or children.

Protection: how long does it last?

Permanent vs. term life insurance is comparable by the length of the contracts. Term life insurance policies are designed to last for a specified time, and once they expire, so does the policy. Permanent life insurance is arranged to last the duration of the insured's life. Policy owners must pay premiums to ensure the policies stay in force, or the policy may lapse and terminate.

Term Life InsurancePermanent Life insurance
Term life insurance lasts the duration of the term, usually 5,10, or 20 years, or until the insured reaches a certain age agreed upon in the contract. Permanent Life insurance covers the insured's lifetime or until age 120, and stays in force as long as the premiums are paid.

Life insurance contracts offer a grace period, usually 31 days if premiums are not paid by the due date. If the policyholder does not pay the premium by the end of the grace period, the policy will lapse, and the protection will end.

How much does coverage cost?

The cost of premiums is another distinguishing factor when considering permanent vs. term life insurance. Term life is considered only a death benefit because it does not accumulate cash value. It also lasts a named period, which lowers the chance of loss during the length of the policy compared to a permanent policy, which lasts the insured's lifetime. Premiums are assigned during the underwriting of the application process.

Actuaries are life insurance mathematicians who determine the cost of life insurance premiums. Actuaries determine premiums based on mortality, interest, and expenses. Mortality reflects the insured's risk of death and the more interest the insurer can earn, the less it needs to charge in premiums. Fees reflect the costs the insurer expects to pay, aside from mortality, such as salaries and commissions.

Insurance companies classify applicants in risk categories. A preferred risk is an individual who is in excellent health, has little or no family history of heart disease, has healthy habits, and has a low-risk job. These applicants are assigned less expensive premiums. A standard risk is acceptable to the insurer, and applicants are given standard premium rates.

A substandard risk is assigned when an applicant is at high risk of loss due to a history of illness, risky habits, or other conditions that insurers deem high risk. They pay higher premiums. The table below shows the average monthly life insurance costs in 2023 for preferred risks at varying ages for a 250k 10-year term policy compiled by quotacy.com.

AgeMaleFemale
30$9.54$8.58
40$11.64$10.81
50$23.15$19.96
60$58.51$40.70
70$175.57$109.09

The following table displays the costs of premiums for a continuous pay $100k participating whole life insurance policy at varying ages, compiled by quotacy.com.

AgeMaleFemale
30$105.05$87.26
40$149.81$123.19
50$227.68$189.66
60$372.88$313.46
70$628.75$564.89

Choosing permanent vs. term life insurance

When comparing term vs. permanent life insurance, each type of policy has advantages and drawbacks. Which policy is right for you depends on your needs and circumstances.

Whole life insurance

If you have achieved your career goals or have found your financial footing, a whole life insurance policy offers a way to cash in premiums with cash value. Policyholders also have the security of the coverage for their entire life.

Term Life Insurance

Term life insurance is the more affordable option of the two types of policies. Most term policies are renewable and can be converted to a permanent policy, usually by a certain age. If you are young and unsure of your future financial security a term policy may be the best option.

Most people carry out their day-to-day lives with a goal somewhere on the horizon. Goals may include a family or starting a business from the ground up. Term and permanent life insurance policies are designed with your goals in mind to provide coverage for a range of different needs.

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