Term life insurance and permanent life insurance are the two main types of life insurance that provide a safety net for your loved ones in case you die. What’s the difference between term life and permanent life insurance? Learn about the similarities and differences of both types of coverage and which policy might suit your needs best.
Term life insurance provides coverage for a set period of time. With term insurance, you can select from a range of coverage amounts and term lengths to meet your needs and budget. The premiums for term life are generally lower than those for permanent insurance. That’s why term life is often the better option for everyday families.
When you buy term life insurance, you’ll pick a predetermined time period for your policy to be in effect, usually 10 to 30 years. The policy will remain in place until the term ends or you stop paying your premiums. In some cases, you may have the option to convert your term life policy into a permanent life policy when your term life policy expires. One difference between term vs permanent life insurance is that term life only has cash value if you pass away while the policy is active. That’s why term life is so affordable – it’s just-in-case coverage if the unexpected happens.
Permanent life insurance, which includes whole life insurance, lasts your entire life as long as you pay your premiums. Because it lasts a lifetime, permanent life premiums are typically much higher than term life rates for similar coverage amounts. Another difference between term life insurance vs permanent life insurance is that permanent life insurance allows you to accrue cash value over time. A portion of your premium for permanent life goes toward the cash value in the policy, and you can withdraw from those funds as needed while you’re still living. Keep in mind that those withdrawals will reduce your policy payout later if you don’t pay them back.
Some of the key differences between term life and permanent life insurance include:
When comparing the cost of term life vs permanent life insurance, term life is much more affordable per dollar of coverage. Term life allows you to pick a coverage length and only pay for coverage during that specific time period, helping to keep overall costs down. With permanent life insurance, you’re paying premiums on coverage that will last for the rest of your life. That lifelong coverage, along with the cash value component, are the main reasons why permanent life insurance is more expensive.
Best value: Term life is more affordable than permanent life and the best value for most families.
Another one of the differences between term and permanent life insurance is that, with term life insurance, you’re able to choose your coverage length, which is typically available in 10, 15, 20, and 30-year periods. This is beneficial if you’re hoping to cover your family for a set period of time, like until your child finishes college or trade school. Alternatively, permanent life insurance lasts for a lifetime, so you won’t have to worry about your coverage ending.
Here, the best policy depends on your individual needs. If you only need coverage to provide peace of mind during a set period of time, then term life is the best policy for you. If you’d prefer to have coverage throughout your life, then permanent life insurance is the way to go.
Best coverage length: Depends on your needs. Term life is best if you only need coverage for a set period of time; permanent life is best for guaranteeing a payout no matter how long you live.
The convertible option is one of the most straightforward comparisons between term life and permanent life insurance. In some cases, a term life policy can be converted to a permanent life policy. However, you can’t convert a permanent life policy into a term life policy. For this reason, if you’re on the fence about which policy you want, it’s best to talk to your life insurance agent. They can help you explore options for term life policies you can potentially turn into a permanent life policy later on.
Best convertible policy: Term life insurance, since it can often be converted into a permanent life policy. A permanent life policy can’t be converted into a term life policy.
Another straightforward term vs permanent life insurance comparison is cash value. With permanent life insurance, your policy can accrue cash value over time. Once it reaches a certain level, you can borrow from the cash value and spend that money how you like (although you’ll need to pay it back to avoid reducing your death benefit). Term life policies don’t accumulate cash value, since you’re just paying for protection during the set time period of your policy. Once you reach the end of the term, the policy simply expires.
Best cash value policy: If you want a policy with cash value, choose permanent life. Term life policies don’t accumulate cash value since the policy is effective for a set period of time.
| Term Life | Permanent Life | |
|---|---|---|
| Length of Coverage | You choose a term length (10, 15, 20, 30 years) based on your needs. | Your coverage lasts your lifetime, as long as you pay your premiums. |
| Premium | Term life premiums are usually the most affordable. | Permanent life premiums are more expensive than term premiums for the same coverage. |
| Medical Exam | A medical exam is not always required. | A medical exam is usually required – but not with Fidelity Life. |
| Guaranteed Payout | Yes, a payout is guaranteed for the duration of your term as long as premiums are paid. | Yes, a payout is guaranteed for the life of your policy as long as premiums are paid. |
| Cash Value | A term life policy does not build a cash value. | A permanent life policy can build tax-deferred cash value. |
When it comes to life insurance, there is no one-size-fits-all. The best policy for you depends on what you and your family need.
If you have a time-bound financial goal or risk, like making sure your kids have enough money to live on until they’re grown, then term life insurance is most likely the best policy choice for you. If you want lifelong coverage with cash value, then permanent life insurance may be a better fit for you. For example, some people have a few years left on a term policy and buy a separate final expense policy to provide a guaranteed cash cushion for funeral expenses.
Still trying to decide which policy may be right to protect your family’s financial future? One of our licensed representatives can help you explore your options and answer any questions.
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