Term life insurance vs. permanent life insurance

What is the difference between term and permanent life insurance?

Both term and permanent life insurance policies are designed to provide financial support in case of the death of a loved one. However, these two types of policies differ in the duration of coverage, price and other details. Term policies offer coverage for a limited amount of time. These policies are relatively simple and can be purchased for a variety of durations, most commonly 10–30 years. Permanent insurance policies offer a lifetime of coverage but are generally more expensive. Read on to understand more about each of these two types of policies.

Benefits of term life insurance

Term life insurance, which offers coverage for a specified period of time, also known as “the term” of the policy, may be a good option for someone who wants a straightforward policy to cover a particular season in life.

• A term policy is quite simple: the insured pays the premiums for the life of the policy and if the insured dies while the policy is in force, a death benefit is paid to the named beneficiaries.
• Term policies are typically less expensive than permanent policies.
• These policies are ideal for covering specific financial obligations such as a mortgage on a home, student loans, college tuition or a small business loan.

Benefits of permanent life insurance

Permanent life insurance policies are more expensive and a bit more complicated, but they’re designed to provide coverage for the entire life of the insured. Permanent policies may earn cash value, which can be taken as a loan during the insured’s lifetime. There are many circumstances when a permanent life insurance policy may be a good option.

• The insured desires for a death benefit to be paid to beneficiaries regardless of when they pass away.
• Permanent life insurance policies can accumulate cash value, which can be accessed during the insured’s lifetime.
• Permanent policies can help provide financial support for a loved one with special needs, such as a child with disabilities.
• A permanent policy can be used to ensure transfer of wealth of your estate to your beneficiaries potentially allowing them to avoid liquidating assets to pay taxes on your estate.

What type of coverage is right for you?

Begin by asking yourself whether your family would have enough to live on, pay off debts (including a mortgage and funeral expenses), and pay for costs to raise and educate your children if you were gone. Remember that when you die, your paycheck stops, leaving a significant difference between your expenses and assets.

Try using an online life insurance calculator to get an estimate of the amount of life insurance you might need, or consult with a qualified life insurance agent for help. If your budget is tight, consider buying the longest term policy you can afford to ensure that you have coverage. Also consider adding policy riders that will allow you to access the policy death benefit in the event of a terminal illness or even convert a portion of your term policy into a permanent policy (such as whole life or universal life).^*

Consider permanent life insurance if:

• You want a lifetime of coverage
• You need to provide support for a special needs child or other dependent who may need care their entire lifetime
• You seek to leverage a death benefit to help your beneficiaries pay for estate taxes
• You’d like a policy that builds cash value that you can access during the life of the policy
• You need to provide funding to ensure a small business or partnership can provide a clean break with the proceeds to secure a buy-out

Consider term life insurance if:

• You need coverage for a specific period of time, such as for a young family up until the children gain financial independence
• If you’re interested in covering a specific financial obligation in case of your death, such as the mortgage on the house or a small business loan
• Your budget is limited and you’re looking for some coverage to protect your family

When to consider term and permanent life insurance

In some cases, a combination of term and permanent policies can provide needed coverage at an affordable cost. For example, an entrepreneur with a young family may invest in a 10-year term life policy to provide enough coverage to pay off a small business loan that was taken to fund a fledgling business. He may also have a permanent life insurance to provide ongoing protection for his wife and children.

Consider a combination of a permanent and term life policy to get the coverage you need, or a term policy rider that allows you to convert a portion of your term policy into a permanent policy at a later date.^*

Get the right coverage with Protective

The first step in taking steps to protect your loved ones is getting a quote. Get started today by visiting Protective’s website to get a quote.

Frequently asked questions about term and permanent life insurance

What happens to term life insurance at the end of the term?

At the end of a term life insurance policy, coverage ends. If you were to die after the end of the term, your beneficiaries would not receive a death benefit. There are several options for you to consider if your term policy comes to an end and you’d still like to have coverage. You could purchase a new policy. In some cases, you may have the ability to extend coverage with a policy rider (check your specific policy provisions), or you could consider converting your term policy to a permanent policy. Your financial goals, stage of life and long-term vision, along with the help of a qualified financial professional, could help you determine which option is best for you.

When should I buy term life insurance?

Term life insurance is important for protecting your family, your loved ones, and ensuring those who care about you aren’t subject to undue financial burden of caring for your debts and funeral expenses upon your death. There is no specific age or milestone that dictates when you should purchase a term life policy, but it’s a good idea to keep in mind that the younger and healthier you are, the less your policy premiums will be. In addition, if you were to become sick, it may not be possible to purchase life insurance. If you have people you love who would suffer financially upon your death, the right time to consider life insurance is now.

How much life insurance do I need?

The face amount of your term life insurance policy is completely dependent upon your particular situation, provision objectives and budget. Here are some questions that may help you determine how much life insurance you might need:

• Would your loved ones be able to replace your income in case of your death or would the life insurance proceeds be used to fund their day-to-day expenses indefinitely?
• Would life insurance proceeds be used to pay off a specific debt such as a mortgage, student loans, etc.?
• How much would it cost for your spouse to outsource tasks that could not be completed if s/he were to take a job after your death? (Things like child or elder care, cooking, cleaning, etc.)
• Is there a small business liability or transaction that would need to be paid off in case of your death?
• How much would it take to cover your burial or funeral expenses?

As you age, it gets more expensive to buy life insurance. Moreover, certain health conditions can make premiums increase — or worse, make it difficult to qualify for life insurance coverage at all. For the same price of a weekly specialty coffee drink, you'd be surprised at how much term coverage you could afford.

For more information on types of life insurance, visit our Learning Center.

^*Not all term policies or life insurance companies offer terminal illness or conversion riders.

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