Term and Permanent Life Insurance – What’s the Difference?

When selecting an insurance policy to provide financial protection for your loved ones there are basically two options to choose from: Term or Permanent. Neither is better than the other; it all depends on the client’s individual needs and specific situation. This article is designed to give you a general idea of the difference between the two.

Term insurance is just like it sounds – it is a temporary policy designed to last for a specific amount of time. The premium is fixed within that time. This is a great fit for someone on a budget that wants to protect their family financially or who is interested in buying term and investing the difference. Premiums are lower than a permanent policy because the term policy only covers a specific chunk of time selected by the insured (which can range from 5 to 35 years depending on the insuring company).

Another factor in price is that generally only 23% of term policies pay out a death benefit and it is less risk to the insurance company. The biggest potential issue that can arise with a term policy is the term running out before the need for insurance. There are so many reasons or related issues for this and no way of knowing for sure if this could happen to you.

A few examples to consider:

  • Insurability

The insured gets diagnosed with a nonterminal disease and will most likely live past their term insurance policy. Once their policy is up, they may or may not qualify for another policy and if they do, their premiums may be higher than they can afford or are willing to pay.

  • Untimely market correction, poor investments or unexpected emergencies

The insured planned on having assets to privately fund any immediate cash needs upon death during a down or seriously down market or had unplanned/ emergency event(s) and needed to use up cash reserves and investments.

  • Significant price increase

This happens IF an extension is offered or if the insured decides to take out a new policy. A 30-year term policy puts most people in their late 50’s or 60’s, depending on when they first took out their policy. This is generally a time where budgeting is an issue as a preparation for fixed retirement income, and assuming the insured is insurable could mean a premium that is double or triple the amount of when they took out the first term policy.

If you do decide to purchase a term policy it may be in your best interest to purchase one that is convertible to permanent.

 

Permanent insurance is also like it sounds. The properly structured policy is designed to last throughout the insured’s lifetime and pay out a death benefit, thus the premiums are more expensive. This type of policy also has Cash Value which can be used for emergencies or retirement purposes and it provides a tax shelter benefit. There are several different types of permanent policies (Whole Life, Universal Life, Indexed Universal and Variable).

The biggest potential issue that can arise with this type of policy is the policy not lasting as long as it was intended. This (in a general sense) happens for one of two reasons:

  • If the policy is improperly structured it may not last until the insured’s death.
  • The insured borrows too much cash value against the policy.

I always recommend that anyone interested in purchasing a policy take some time to sit down with an experienced professional to help them make the best choice for them.

So neither Term nor Perm is “better” than the other, rather it is simply a matter of need, personal preference and circumstance. People ask me “What’s your best policy?” or “Which is better? Term or Permanent?” I simply answer, “It depends, what are you trying to accomplish?”

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