About 54% of all Americans have selected and keep some form of life insurance. If asked, most people would likely agree with the importance of protecting their loved ones by selecting life insurance.
So, why don’t more people have life insurance? Despite agreeing with its importance, some may think it’s too expensive and out of their budget. In fact, about 50% of people overestimate the cost of term life insurance.
Others might be confused about the many different types of life insurance available. Term life insurance vs. permanent life insurance, which is better? Which costs more and why?
These are all logical questions for someone considering life insurance for their loved ones. Read on to learn more about term life insurance and permanent life insurance and decide which is the right option for your life insurance needs.
What Is Term Life Insurance?
Term life insurance is one popular option for selecting life insurance. In term life insurance, you purchase a policy for a pre-determined period or term.
You pay premiums on the policy during this term. If the policyholder passes away during the pre-determined term, then their beneficiaries are paid a death benefit.
If the policyholder doesn’t pass away during the life insurance term, one of three things can happen. First, the policy can expire, and they are no longer covered with life insurance.
The second option is to renew the term insurance for another term. The rate may change, though because the policyholder is now older.
Finally, the policyholder could convert the policy to a permanent life insurance policy.
Most term life insurance policies are available in terms of 10, 15, or 20 years. Of course, you need to consider how long you anticipate needing coverage if you have people who depend on you and your income.
There are no other benefits to term life insurance. It doesn’t offer a savings component or build-up in value. The policy is worth the agreed-upon death benefit amount when the policyholder passes away.
What Is Permanent Life Insurance?
Unlike term life insurance, permanent life insurance doesn’t have an end date. As long as the policyholder continues to pay premiums throughout their life, the insured’s beneficiaries will receive the death benefit when they pass away.
Permanent life insurance comes with no expiration date as long as the premiums for the policy are paid. Usually, the premiums remain the same throughout the policy’s life, although there are some exceptions.
A permanent life insurance policy often requires a basic medical screening and exam from the insurance company.
It also comes with a potential investment and savings component called its cash value. This makes this type of policy popular for those looking for long-term coverage.
The policy’s cash value can grow over time, with a tax-deferred status. Policyholders are allowed to borrow against their investment in the cash value of the policy.
If you borrow against the policy and pass away before it’s paid back, it can reduce the policy’s death benefit amount.
Types of Permanent Life Insurance
If you’re considering permanent life insurance as an option for you, you should know there are several different types of permanent insurance.
Each offers slightly different features and benefits to the insured. Let’s take a closer look at the different types of permanent life insurance.
Whole Life Insurance
Whole life insurance is a very straightforward form of permanent insurance. You decide on the amount of the death benefit. You pay the premiums, which remain consistent over the course of your life.
When you pass away, the death benefit that was initially agreed to is paid out. Some whole life policies grow their cash value over time with a set interest rate. Sometimes these policies will also pay dividends to the policyholder while they’re alive.
Universal Life Insurance
Universal life insurance is a slightly different type of permanent life insurance. Over the policy’s life, the policyholder can adjust the death benefit amount and the premiums.
Many policyholders find this option desirable as their budget changes with time.
The policy’s cash value can grow in value from a fixed interest rate. Once the policy has grown enough to cover the death benefit, some insurers allow you to use the cash value to pay premiums, although this would reduce the death benefit amount should you pass away during this time.
Variable Life Insurance
A variable life insurance policy is much like a variable rate mortgage. You might get variable premiums and a variable interest rate. You can, however, decide where you want your cash value invested.
You could opt for stocks, bonds, or other financial products. The caveat to this option is that if your policy doesn’t do well where it’s invested, it could reduce your death benefit amount.
If you’re interested in variable life insurance, you might ask for a policy that has a minimum death benefit payout.
Final Expense Insurance
Final expense insurance is different than the other types of permanent insurance. Its intention is to pay out enough upon the policyholder’s death to pay funeral and end-of-life expenses.
It makes sense then that the death benefit for this type of permanent insurance is lower than other types. This means premiums are likely to be lower and a medical exam isn’t usually required for coverage.
Term Life Insurance vs. Permanent Life Insurance
Now that you have some background on both term life insurance and permanent life insurance, let’s compare the two and consider their differences.
Both policies will pay a death benefit as long as the premium is paid. In term insurance, the coverage is for a set period of time. In permanent life, the coverage is for the life of the insured.
Both types of insurance typically offer consistent premiums, where you’ll pay the same amount for as long as you have the policy. There are a few exceptions for both depending on the specific policy. Both guarantee that death benefits will be paid.
There are a couple of features that permanent life offers that are not available in term insurance. In permanent life, you can build up the cash value of the policy and you have the option of borrowing against it if you need to.
Cost Considerations for Life Insurance
Aside from the type of policy, there are several factors that impact the cost of life insurance. These include:
- Gender of the policyholder
- Age of the policyholder
- General health of the policyholder
- Smoker or nonsmoker
Not all insurance companies will ask all the questions, but you’re likely to need more health and background information for a permanent policy over a term policy.
In term insurance, the amount of the death benefit and the term will be big factors for cost.
In permanent life, the amount of the death benefit and the age of the policyholder will impact the cost, especially knowing they will be insured for life.
Generally speaking, term insurance tends to be less costly than a permanent life policy.
Why You Might Choose Term Life Insurance
As you try to decide which insurance is the better choice for you, there are a few reasons why you might opt for term life insurance. If your budget is tight, this will be a less costly option. You might also be getting the insurance knowing you need the death benefit to cover a specific thing.
For example, you might choose term life insurance during the life of your mortgage. If you pass away, you know the death benefit could cover the balance on a mortgage, allowing your family to stay in their home.
You might choose term insurance as a short-term option when your budget is tighter. One thing to remember though, the cost of life insurance is always lower the younger you buy it.
If you wait too long to buy permanent life insurance, the cost will be greater.
Why You Might Choose Permanent Life Insurance
When you purchase permanent insurance, the real benefit is that you know you’re covered for life.
When you buy the policy young, you get the best rate possible and in most cases the rate remains constant throughout the life of the policy.
You can also use the policy as an investment tool to build cash value.
Which Life Insurance Is Right for You?
Getting life insurance provides important security for your loved ones if you’re unable to do it. When comparing term life insurance vs. permanent life insurance, there isn’t one right or wrong type of insurance.
You need to consider the type of policy and what is the best fit for your needs.
If you want more information about life insurance options, we can help. Contact us today to get started planning your life insurance needs.