Term Life Insurance vs. Permanent Life Insurance

The main differences between a term life insurance policy and a permanent insurance policy, such as universal life insurance, are the duration of the policy, the accumulation of a cash value, and the cost.

Cost of Premiums

Term life policies are ideal for people who want substantial coverage at low costs. Customers who own whole life insurance pay more in premiums for less coverage but have the security of knowing they are protected for life.

While many buyers favor the affordability of term life, they are paying premiums for an extended period, and having no benefit after the term’s expiration is an unattractive feature. Upon renewal, term life insurance premiums increase with age and may become cost-prohibitive over time. Renewal term life premiums may be more expensive than permanent life insurance premiums would have been at the issue of the original term life policy.

Availability of Coverage

Unless a term policy has guaranteed renewable policy, the company could refuse to renew coverage at the end of a policy’s term if the policyholder developed a severe illness. Permanent insurance provides coverage for life as long as premiums are paid.

Investment Value

Some customers prefer permanent life insurance because the policies can have an investment or savings vehicle. A portion of each premium payment is allocated to the cash value, with a growth guarantee. Some plans pay dividends, which can be paid out or kept on deposit within the policy. Over time, the cash value growth may be sufficient to pay the premiums on the policy. There are also several unique tax benefits, such as tax-deferred cash value growth and tax-free access to the cash portion.

Financial advisors warn that the growth rate of a policy with cash value is often paltry compared to other financial instruments, such as mutual funds and exchange-traded funds (ETFs). Also, substantial administrative fees often cut into the rate of return. Hence, the common phrase “buy term and invest the difference.” However, the performance is steady and tax-advantaged, a benefit when the stock market is volatile.

Other Factors

Apparently, there is no one-size-fits-all answer to the term versus permanent insurance debate. Other factors to consider include:

  • Is the rate of return earned on investments sufficiently attractive?
  • Does the permanent policy have a loan provision and other features?
  • Does the policyholder have or intend to have a business that requires insurance coverage?
  • Will life insurance play a role in tax-sheltering a sizable estate?

Term Life Insurance vs. Convertible Term Life Insurance

Convertible term life insurance is a term life policy that includes a conversion rider. The rider guarantees the right to convert an in-force term policy—or one about to expire—to a permanent plan without going through underwriting or proving insurability. The conversion rider should allow you to convert to any permanent policy the insurance company offers with no restrictions.

The primary features of the rider are maintaining the original health rating of the term policy upon conversion, even if you later have health issues or become uninsurable, and deciding when and how much of the coverage to convert. The basis for the premium of the new permanent policy is your age at conversion.

Of course, overall premiums will increase significantly since whole life insurance is more expensive than term life insurance. The advantage is the guaranteed approval without a medical exam. Medical conditions that develop during the term life period cannot adjust premiums upward. However, the company may require limited or full underwriting if you want to add additional riders to the new policy, such as a long-term care rider.

 

What Is Term Life Insurance?

Among insurance policies, term life insurance guarantees payment of a stated death benefit if the policyholder dies within the stated term period. Term periods may last anywhere from a year to 30 years. Importantly, term life insurance policies do not possess monetary unless the holder dies within the term. However, term life insurance may be less costly than other life insurance options, such as whole life insurance.

 

What Is the Difference Between Term Life and Whole Life Insurance?

Term life insurance occurs over a predetermined period of time, typically between 10 and 30 years. Term policies may be renewed after they end, with premiums recalculated according to the holder’s age, life expectancy, and health. By contrast, whole life insurance covers the entire life of the holder. Unlike a term life policy, whole life insurance includes a savings component, where the cash value of the contract accumulates for the holder. Here, the holder can withdraw or borrow against the savings portion of their policy, where it can serve as a source of equity.

 

Do You Get Your Money Back at the End of a Term Life Insurance Policy?

The holder will not have their money returned once a term life insurance policy expires, if they outlive the policy. Meanwhile, whole life insurance premiums may cost as much as 10 times more by comparison. This is because the risk to the insurer is much lower with term life policies.

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