Difference Between Term & Permanent Life Insurance

What is Term Life Insurance?
A term life insurance plan is one with a limited coverage period. When purchasing this type of plan, a policyholder typically chooses a set period of time (or term) that they want to be covered for and commits to paying a premium for that period. If you decide to purchase a 10-year term life insurance plan, you will be given the choice to renew your coverage at the end of 10 years, or you can let the coverage end. This is the most basic type of life insurance and is often the preferred option as it is low-cost and easy for most people to understand.

The most important thing to remember about this policy is that it has no additional cash value, and will only be paid out upon the policyholder’s death. If the policyholder dies before the end of the term, there is a payout under term life insurance, but if they die after, their beneficiaries get nothing at all. Because of this trait, it is life insurance in its purest form – it only exists to insure people against loss of life, and all premiums paid are used to cover this cost.

Premiums are based upon an applicant’s age, health, and life expectancy and can vary between different insurers. This explains the common wisdom of purchasing life insurance when one is young, as  premiums are often lower and one is allowed a longer term at a fixed rate. If a policyholder wishes to renew their policy at age 40, it would cost more than if they had bought a 30-year term at age 25.

Is Term Life Insurance Suitable for You?
Generally, people tend to opt for term life insurance plans once they start a family. If you are the primary breadwinner for a young family, you may decide to purchase one of these policies for 20 years just in case something happens to you while your children are still of schooling age. It is also a good option if you are quite certain your purpose for buying the policy is that you only want to cover your dependents while they are still vulnerable. The temporariness of a term plan would be suitable for this as you would assume that your dependants will no longer need the coverage as they get older.

What is Permanent Life Insurance?
Permanent life insurance is a collective term for life insurance plans that do not expire, and usually combine a death benefit with a savings or investment portion. Its two main types are whole and universal life insurance policies. Whole life plans  allow policyholders to pay fixed premiums their whole lives while accumulating cash value, and universal life plans provides flexible premiums and savings elements.

Unlike term insurance, permanent plans have a cash value from which the policyholder can borrow or withdraw a lump sum if required. The cash value is built from the investment portion, while the insurance component is paid out upon death, much like term insurance. As the name implies, this policy covers the holder for their whole life and only ends upon death.

Is Whole Life Insurance Suitable for You?
If you prefer the security of having coverage for your whole life or foresee wanting to leave a sum to your dependants regardless of their age then you may want to go for this plan. You also pay a fixed (albeit higher) premium for this plan, but you will not be susceptible to rate changes as you grow older or if your health declines. There is also the added benefit of having an investment component, as that may result in the value of your policy increasing if the insurance company makes more than its projected returns. Do keep in mind that while that is ideal, your guaranteed amount is often lower than the projected amount.

So, Which Plan Should You Choose?
While many people prefer the simplicity and affordability of a term life plan, there are also others who choose whole life plans for their security and additional benefits. It is a similar conundrum to the renting or buying argument. Some people prefer the flexibility of renting and feel like they may not want to live in the same place forever, but others are adamant that renting is a waste because you eventually emerge without an asset. The same can be said for the insurance debate, and it boils down to a few final considerations.

Firstly, the purpose of your insurance policy should be very clear. If you only want to protect your dependants for a set amount of time, it makes more sense to go for term. Secondly, your life insurance purchase should fit within your larger financial plan. If you can afford it and might want to withdraw a lump sum sometime in the future for a big expense, then the whole life plan would suit you better. However, if you prefer a simple death benefit and would prefer to invest the rest of your money in other instruments, a term plan would definitely serve you better.

As with most things, there are no direct answers to whether term or whole life plans would suit you better – but these considerations can certainly give you a roadmap towards making the right decision for you.