The term versus permanent life insurance debate has been going on for years. We break them both down so you can make an educated decision about which type of insurance works best for you.
Term vs. Permanent basics
Consider term life for:
- Death benefit protection without cash value accumulation.1
- Life insurance on a limited budget.
- Ability to convert to long-term life insurance.
Consider whole life for:
- Long-term death benefit protection.
- Stable cash value accumulation.
- Potential to receive dividends.
Term life insurance benefits
- Term life insurance provides coverage for a specific period. It is also less expensive than permanent life insurance which accumulates cash value and provides other benefits. Term life insurance has a guaranteed death benefit2, but no cash value, and its premiums will either stay level or increase at pre-determined intervals, such as after one year, five years, 10 years, or 20 years.
- Term life insurance is a great choice when your protection needs are expected to be high for a period of time, then drop back, such as when your family is growing. It can also be an effective way to supplement permanent insurance during high-need years, such as when family and other financial responsibilities are outpacing income.
- In these situations, term coverage allows you to obtain crucial death benefit protection that better fits your current budget. Also, if the coverage is convertible (the term policy can be “converted” to a comparable cash value policy, without the need to provide evidence of insurability), you can get the coverage you need today—with the ability to obtain permanent coverage in the future.
The disadvantages of term life insurance.
- Term life insurance provides a death benefit only, for a specific period. When the term expires, so does your protection. If you stop paying premiums, the coverage also ends.
- Once the contract expires, that’s it. If your policy expires at midnight on December 31, and you die at 11:59 on New Year’s Eve, your beneficiary receives the full death benefit. If you die at 12:01 on January 1, however, your beneficiary receives nothing.
- Purchasing term insurance is often compared to renting a house. When you rent, you get the full and immediate use of the house and all that goes with it, but when your lease expires, you must renew the lease (probably at a higher cost) or leave. Even if you rent the house for 30 years, you have no “equity” or value that belongs to you.
- There is a very real danger that you could suffer health reverses and be uninsurable when the term coverage expires. While many term policies are convertible to permanent coverage, others may not be. Even if the coverage is convertible, there are time limits. If the time period in which conversion is allowed has passed, you may be required to reapply for coverage. If you are found to be uninsurable at that time, you will be without insurance.
- Since premiums increase at the end of the term period, the long-term cost of term life can be burdensome. That’s why the term policy’s conversion privilege is so important. This valuable feature is usually available in the first few years of the policy and allows you to convert to permanent insurance without submitting evidence of insurability.
- Converting to a permanent policy lets you “lock in” a fixed and level premium. This coverage can never be canceled, provided premiums are paid.
Permanent life insurance benefits
Here are just some of the reasons why permanent life insurance with cash value can be a strong long-term solution for many people:
- Cash value life insurance provides lifelong insurance protection, provided premiums are paid. With few exceptions, your policy cannot be canceled by the carrier once you have been approved for the coverage. Regardless of your health, the insurance will remain in force.
- Despite higher initial premiums, cash value life insurance can be less expensive than term in the long run. Your premiums will be set when you purchase the policy, and they cannot be raised, no matter what happens to the economy or to your health. When your term policy is up for renewal, your premiums will increase. As a policy owner, you automatically become eligible to receive dividends. You can use them to purchase additional paid-up insurance to grow your policy, use them to help offset the cost of future premiums or use them for any other purpose.3 Dividends are not guaranteed, however; there are instances when an insurance company will not declare them.
- A whole life policy can eliminate the problem of future insurability. Cash value life insurance does not expire after a certain period, so you will not lose your insurance if health problems arise. Also, some policies contain guaranteed purchase options, which allow you to buy additional coverage at specified times, regardless of your health.
- Remember “cash value”? Cash value builds at a fixed rate determined by the insurer. It’s designed to reach the size of the death benefit when the policy matures. This cash amount—part of which is guaranteed under many policies—can be used in the future for any purpose you wish. If you like, you can access cash value for a down payment on a home, to help pay for your children’s education, or to provide income for your retirement if the insurance needs decrease. Accessing cash value reduces death benefit and available cash surrender value.