There are a few major distinctions between term and permanent life insurance policies that will assist you in determining which form of coverage will best fit your needs.
Simply put, term life insurance covers you for a set period of time. When the policy’s term expires, it’s usually renewed. During the renewal term, the rate may increase and the coverage amount may decrease. Term life insurance is frequently less expensive than permanent life insurance. As a result, term life insurance is frequently the favored alternative for policyholders on a tight budget.
Cost
Because of the policy’s longevity, permanent life insurance policies nearly usually have greater premium costs than term life insurance policies. Permanent life insurance costs are also inflated by the cash value component (which we go over in detail below). The cash value part of the policy usually has a guaranteed rate of return.
The cost of term and permanent life insurance is mostly determined by the insured’s age and health. Some permanent policies, such as Ethos’ guaranteed issue whole life, bypass the typical underwriting procedure and instead examine characteristics such as age and sex rather than health.
Term Length
A term life insurance policy may run for 30 or 40 years, but if not renewed, the policy will expire and coverage will cease. For a death benefit to be paid to the policy’s recipient, the insured individual must die during the policy’s term.
Depending on the insurance company issuing your policy, you’ll choose a term duration between 2 and 40 years when you start your life insurance coverage. You’ll also choose the amount of life insurance protection you require, which can range from a few thousand dollars to over a million dollars. The insurance company will set the cost of coverage at that time. As long as premiums are paid, a permanent or whole life insurance coverage lasts for the insured person’s lifetime, regardless of how long they live. Their heirs are guaranteed a death benefit if they die.
Death Benefits
Premiums must be paid for both term and permanent life plans in order to provide a death benefit to chosen beneficiaries.
There is no death benefit in term insurance if the policy term or renewal expires before the insured individual dies, and the insurance provider will not pay a claim. The death benefit will be paid if the insured dies while the term policy is active.
Beneficiaries of permanent life insurance receive a death benefit regardless of when the insured person dies. If the insured dies within the first couple of years of the policy, certain permanent policies offer a graded death benefit, which pays out a percentage of the full face amount if the insured dies within the first couple of years of the policy.
Convertible Policies
Term insurance that includes a conversion option is usually more expensive than term policies that do not. If your term life insurance policy is convertible, you can ask for a portion of it to be converted to a permanent policy by submitting a request before the insurance company’s conversion deadline.
This is a fantastic alternative for folks who desire the cost-effectiveness of a term policy at first but the coverage of a permanent policy later on.
After conversion, the permanent life insurance policy will have a greater premium than the term policy, but it will also include the benefits of permanent life insurance.
Cash Value
There is no monetary value in term life insurance contracts. Their benefits are only paid to the beneficiaries throughout the life of the policy and upon the covered person’s death.
The majority of permanent life insurance policies have a cash value component that grows as premiums are paid. This monetary worth is usually guaranteed to rise at a minimum rate of return.
The insured individual can usually borrow against the accrued cash value in the insurance, remove the cash value, or leave it in the policy to maximize the death benefit.
