One of the most crucial financial decisions you’ll ever make is selecting the appropriate life insurance.
Knowing the differences between permanent life insurance and term life insurance is important, whether you’re reevaluating your current coverage or you’re just beginning to consider how to safeguard your loved ones.
Every type has pros and cons of its own, and the right option for you depends on your particular situation, requirements, and objectives.
Let’s dive into the pros and cons of each type to help you figure out which one might be the best fit for you.
What is Term Life Insurance?
It is the simplest kind of life insurance.
Depending on your selection, it offers coverage for a set amount of time, or “term,” which can be anywhere from 10 to 30 years. You pay a regular premium during this period, and your beneficiaries will get a death benefit if you die away while the policy is in effect.
This benefit is a lump sum of money that can be used to cover things like funeral expenses, mortgage payments, or any other financial needs your family might have.
Pros of Term Life Insurance
One of the biggest advantages of term life insurance is its affordability.
The affordability of term life insurance is one of its main benefits. Term life insurance can be a very affordable option if you’re on a tight budget or just require coverage for a set amount of time—for example, until your children are adults or your mortgage is paid off.
Generally, your premiums for a term policy will be cheaper the younger and healthier you are at the time of purchase. This makes it a desirable choice for young families in search of affordable, comprehensive coverage.
The ease of use of term life insurance is another advantage.
Unlike permanent life insurance, which can come with a lot of bells and whistles, term life insurance is easy to understand. You pay your premium, and if you pass away during the term, your beneficiaries get the payout. There’s no cash value to manage, no investments to monitor—just straightforward protection.
Term life insurance also offers flexibility in terms of the length of coverage. Whether you need a 10-year policy to cover a short-term loan or a 30-year policy to protect your family until your children are independent, you can tailor the policy length to match your needs.
With this flexibility, you can match your coverage to your financial obligations. This way, it provides peace of mind for your family when they need it most.
Cons of Term Life Insurance
However, term life insurance does come with some drawbacks.
The most significant is that it only provides temporary coverage. Unless you choose to renew it or convert it to a permanent policy, your insurance expires after the term ends.
The catch is that renewing a term policy can be expensive, especially if you’re older or your health has declined. You can find yourself in a situation where you require insurance but are unable to pay the higher premiums as a result.
Another downside is that term life insurance doesn’t build cash value. While you do get the benefit of lower premiums, you’re not building any equity in the policy. This means that both you and your beneficiaries will receive nothing if you live longer than the term. For some people, the idea of paying into something for years without any return can be a dealbreaker.
What is Permanent Life Insurance?
On the other hand, permanent life insurance is meant to last the entirety of your lifetime. The insurance is in effect as long as you continue to pay the premiums, and your beneficiaries will get the death benefit when you pass away.
But permanent life insurance isn’t just about providing a death benefit. It also has an increasing cash value component that you can borrow against or even take out while you’re still living.
Pros of Permanent Life Insurance
The lifetime coverage offered by permanent life insurance is one of its main advantages. This implies that, if you have paid your premiums on time, your beneficiaries will receive a death benefit regardless of when you die away—tomorrow or fifty years from now.
This might provide you peace of mind, particularly if you want to make sure that your loved ones are taken care of no matter what or if you have long-term financial obligations.
The cash value component of permanent life insurance is an additional benefit. A portion of the money you pay in premiums is invested or saved within the policy, growing tax-deferred over time. This cash value can be used as collateral for a loan, to cover premiums, or even to take it all out, however doing so will lower the death benefit.
Because of this characteristic, permanent life insurance is a flexible financial tool that you can use for a variety of goals throughout your lifetime.
Certain permanent life insurance plans also provide living benefits, which let you access a percentage of your death benefit in case you need long-term care or are diagnosed with a serious illness while you’re still alive. This can be a valuable feature, especially as healthcare costs continue to rise, providing you with a financial cushion during difficult times.
Cons of Permanent Life Insurance
However, the benefits of permanent life insurance come at a cost. The biggest drawback of permanent life insurance is its expense. Premiums for permanent policies can be five to ten times higher than those for term life insurance, which can make it prohibitively expensive for some people. This higher cost is due in part to the lifetime coverage and cash value accumulation, but it can be a significant burden if you’re on a tight budget.
Permanent life insurance policies can also be complex, with various fees, charges, and investment components that can be difficult to understand. Unlike term life insurance, which is straightforward to manage, permanent life insurance requires a deeper level of financial literacy.
You’ll need to stay on top of the policy’s performance, especially if you have a variable policy where the cash value is tied to market performance. This complexity can be overwhelming, particularly if you’re not comfortable with financial products or don’t have the time to manage the policy closely.
Another potential downside is the investment risk associated with certain types of permanent life insurance, like variable life insurance. These policies have a risk of losing money if the investments underperform, even though they may yield larger returns.
If you’re risk-averse or prefer more predictable financial products, this aspect of permanent life insurance might not be appealing.
Deciding Between Term and Permanent Life Insurance
So, how do you choose between term and permanent life insurance? It comes down to your individual needs, budget, and financial goals.
Term life insurance may be the ideal choice if you’re searching for simple, cost-effective protection for a set amount of time. It’s a great option if you need to pay for certain expenses without going over budget, like paying off a mortgage or supporting your kids’ college tuition.
However, permanent life insurance can be a better option if you’re searching for lifetime protection together with the extra advantages of cash value accumulation and living benefits.
Although it’s more expensive, it offers a range of features that can help you build wealth, plan for the future, and provide long-term security for your loved ones. Consider your options carefully, and don’t be afraid to speak with an experienced insurance expert who can assist you in navigating the process. Your future self—and your loved ones—will thank you for it.
