Shopping for a life insurance policy? You’re probably considering one of two types: term life insurance and permanent life insurance. The major difference between them is how long the policy is active, the amount you’ll pay per month and whether your beneficiaries are guaranteed to receive your death benefit when you die. Explore the most common types of life insurance using the guide below before you sign onto a life insurance policy.
What Is Term Life Insurance?
Term life insurance lasts for a specific period of time. The “term” in the phrase “term life coverage” refers to the amount of time that your policy is active. When you sign onto a policy, you’ll choose a term — most term life insurance policies come with initial terms of 10, 20 or 30 years. However, it is possible to purchase a policy with a term of only a few years if you want to find very short-term coverage to financially protect your family by covering, for example, the remaining years of amortization on a mortgage loan.
If you die during your policy’s term, your life insurance company will pay a death benefit to your beneficiaries. If you outlive your policy, your term life insurance policy will expire worthless. Your beneficiaries will not be paid your death benefit unless you decide to renew your policy or convert your policy to permanent life insurance. Term life insurance policies do not have a value beyond the death benefit that you choose when enrolling in the policy, and these policies are the easiest and most straightforward type of life insurance to understand.
Read more >> Best Term Life Insurance
What is Permanent Life Insurance?
Permanent life insurance does not have a set term during which your policy is active. So long as you continue to make your premium payments and you don’t lie about your medical history, permanent life insurance policies will last your whole life. Your beneficiaries are guaranteed to receive your death benefit — no matter when you die — if you are up-to-date on your premiums.
Permanent life insurance policies also include a cash value that builds over time. Each time you make an insurance payment, your insurance provider will devote a small percentage of your premium to a cash value savings or investing account. Depending on the returns the life insurance provider sees during the year and the type of permanent life insurance policy you invest in, you may also receive dividends quarterly or annually.
You can access the cash value of your policy during your lifetime, unlike your death benefit. As your cash value builds, you can make withdrawals from the policy’s value or take out a loan against the value that your account accumulates. This means that in addition to providing your beneficiaries with a death benefit, your life insurance policy can also act as a savings and investing vehicle.
Many types of permanent life insurance policies are available. The most commonly sold type of permanent life insurance is whole life insurance. With a whole life insurance policy, your premiums and death benefit usually stay fixed throughout the life of your policy.
Read more >> Best Permanent Life Insurance
Who Benefits From Permanent Life Insurance?
Anyone looking for a life insurance policy that will provide them with benefits while they are still alive benefits from permanent life insurance. Because permanent life insurance policies include a cash value component, they can be used as investment vehicles as well as future protections for your beneficiaries.
You also have the option to overpay into your permanent life insurance policy, which helps the value of your policy compound more quickly. You may even receive dividends into your policy, which further adds to the amount of money you’ll be able to access while you are still alive. This makes permanent life insurance a viable option for anyone who believes they may need to access a well of cash for future major expenses.
Drawbacks of Permanent Life Insurance
Price is the biggest drawback of permanent life insurance policies. Permanent life insurance is significantly more expensive than term life insurance policies that guarantee a payout to your beneficiaries, which means the insurance company takes on much more risk when issuing you a policy. Depending on your age, you could end up paying thousands of dollars more per month for a permanent life insurance policy than you would for a term life insurance policy with the same death benefit.
If you miss a policy payment, you also run the risk of having your coverage lapse. If you allow your coverage to lapse and your policy cancels, you’ll need to purchase a new policy if you want to maintain coverage. As you’ll be enrolling in your new policy later in life, you’ll also be locked into higher monthly premiums.
Who Benefits From Term Life Insurance?
Term life insurance can be a better choice for anyone looking for temporary, affordable protection. For example, if you’re looking to provide a layer of financial safety for a spouse until they can access Social Security benefits, you might select a term life insurance policy. Term life insurance policies also leave you with more money in your household budget to invest in the long term, which can make it a great choice if you’re still working and contributing to a retirement account like a 401(k) with a match program.
Drawbacks of Term Life Insurance
Most term life insurance policies expire without paying out a death benefit, which is —a big drawback. While these policies are much more affordable than permanent life insurance policies, your beneficiaries are not guaranteed to receive your death benefit. Though you may have the option to recoup a portion of your premiums by converting your policy to a whole life insurance option after your term expires, this is prohibitively expensive for many people. Term life insurance policies also do not accumulate a cash value, which means that you cannot access any benefits from the policy while you are still alive.
Compare Life Insurance
Dozens of life insurance companies offer a variety of policies across the country. Many companies that offer term life insurance policies also offer permanent life insurance options, though some providers focus on offering only a single type of life insurance for the sake of simplicity. The key to finding the most affordable life insurance for your needs, no matter the type of coverage you’re looking for, is to do your research and collect a few quotes from competing providers before you commit.
Browse a few recommended life insurance providers and begin comparing your options with the following reviews and insights.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.
- securely through Haven Life Insurance's websiteBest For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Comparing Term Life and Permanent Life Insurance
Should you purchase a term life insurance or a permanent life insurance policy? That depends on your household budget and how you want to protect your beneficiaries. If you’re looking to save money on life insurance and get coverage only for a temporary period of time, term life insurance will be more beneficial for you. However, if you’re looking to use your insurance policy as an income or retirement savings vehicle or if you’re willing to pay more to guarantee your beneficiaries receive your death benefit, permanent life insurance can be worth the extra expense.
Frequently Asked Questions
What happens to term life insurance at the end of the term?
If you do not die before your life insurance policy reaches the end of its term, it will expire worthless in most cases. However, some insurance companies will also provide you with the option to convert your term life insurance policy to a whole life insurance policy once the term is up. Though you’ll pay more in premiums with a convertible policy, this can provide you with an opportunity to maintain your coverage when your term passes. If you don’t want to convert your term policy to a whole life insurance policy, you can allow it to expire or attempt to purchase a new term policy.
What is the difference between whole and permanent life insurance?
The phrase “permanent life insurance” is an umbrella term that’s used to refer to policies that do not have a set term during which they are valid like limited term life insurance policies do. Whole life insurance policies are a type of permanent life insurance that lasts throughout your life and contains both a death benefit and a cash savings component.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.