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The Difference Between Term Life and Permanent Life Insurance

Term Vs. Perm Life Insurance

If you have to buy life insurance, or even if you are just selecting one of the choices your employer offers, it is important to understand the difference between term and permanent policies. The difference is actually very simple. It is only because of some additional features you can add to your policy that it may seem complicated.

Term Life Insurance

The keyword here is term. That refers to a span of time that the policy is written for. So this means that even if a term policy is written for 10, 20, or 30 years, it is still temporary. Because it is temporary, and because insurers underwrite these policies to evaluate the risk that the applicant will survive the policy, premiums are generally lower. That is why term is popular with many people. They can purchase a lot more coverage for less money.

Keep in mind that a straight term policy will end after the term is over. The policy will not have any cash value either.

Now some term policies have some options that can make them more flexible. For example, a return of premium rider (ROP) may refund all premiums is the insured person survives the policy. This costs a bit more than straight term, but it means the policy will have some cash value at the end. Some term policies also have an option to convert the to permanent life insurance before the contract is over. So this gives the policy owner an option to change their mind and extend coverage later.

Why buy term life? Again, the premiums are usually lower, so it is possible to buy more coverage at an affordable price. This can be a good option for people who are concerned about covering some things that will also expire. Consider people who want to make sure that a mortgage gets paid off or kids go to college is something happens to one of the bread winners. These type of people may want to purchase term policies.

Permanent Life Insurance

Most people think of whole life when they think of permanent life insurance. This means that the policy will cover the person for their whole life as long as the policy is kept in force. By keeping a policy in force, we usually mean that the premiums are paid. Since these policies can grow an actual cash value, and since they do not expire after a term, the premiums are more expensive.

Why buy whole life insurance? People who want to make sure that they are covered for their entire lives would want a permanent policy that will not expire. Such policies are usually considered by people who want to make sure that final expenses can be paid. Final expenses are things like burial costs and settling debts. Another use for whole life is a tax advantaged way to transfer estate assets.

Another form of permanent life insurance is called universal life. It is the newest form of life policy. Universal life is a bit more complicated, but can have some advantages for some people. It combines insurance and asset building. It is also flexible. With term or whole life, a set premium is usually paid. With universal life, premiums can vary a bit, depending upon the budget and goals of the policy owner.