Term vs. perm life insurance: Which one is right for you?


choiceTerm or perm? This crucial decision is the first you'll face as you evaluate your life insurance options. Term life insurance and permanent life insurance not only denote different coverage durations, but also a different benefit structure. To find out which life insurance is right for you, it's important to understand the details of each policy, down to the fine print.

Term insurance offers life insurance coverage for a specified time period, from one to 30 years, but typically in 10-, 15- or 20-year terms. The policy is a straightforward insurance agreement: The insurance company pays a tax-free “death benefit” to your heirs if you die during the policy period. The simplicity of a term life arrangement makes it a relatively low cost life insurance.

Permanent life insurance offers lifetime coverage and the opportunity to build equity through cash value. Cash value life insurance gradually accrues, tax-deferred, throughout the life of the policy and can be accessed to cover premium payments or leveraged as a loan. Cash value may also be converted into an annuity or collected in full if you decide to surrender the policy.

Within these two forms of life insurance you'll find infinite variation in fees, premiums, provisions, and payout terms. Term life policies offer either a “level premium” or a “yearly renewable” term premium structure. Permanent life insurance comes in many varieties – including whole, universal, variable, and variable universal -- featuring different premium payments and investment strategies.

When to choose term life insurance

Term life insurance is ideal if your key life expenses are temporary, like a mortgage. Term life plans can be coordinated to expire after mortgages and loans have been paid off, or after children have reached maturity or graduated from college.

Choose term life insurance if you:

  • Support dependents such as children or a spouse
  • Pay the mortgage for your family home
  • Want insurance coverage for future college costs
  • Prefer flexibility and control over your retirement investment
  • Need low cost life insurance.

Since term plans do not build cash value, premiums are much lower. This can free up your savings for investment in other, potentially more promising investment vehicles. Here’s more on the basics of term life insurance.

When to choose permanent life insurance

Permanent life insurance provides not only peace of mind through lifelong coverage, but also the opportunity to build cash value over time.

  • Choose permanent life insurance if you:
  • Have an estate to protect on behalf of your heirs (the death benefit can cover estate tax expenses)
  • Have a disabled child or other lifelong dependent
  • Own a business and want to ensure continuityWant to provide funds to your heirs no matter when you die
  • Can commit to the policy long term.

Pemanent life insurance makes sense if you either anticipate a lifelong need for life insurance benefits or want to use the policy as a means of investing for retirement through “forced savings.” Be aware, however, that permanent plans require a committed, long-term investor; these plans can take 20 years or more to build substantial cash value.

When you’ve built enough cash value, it can be used to pay your premiums. This is known as being “paid up.” Here’s more on the basics of permanent life insurance.

Dual life insurance needs

Since these two major types of life insurance serve different needs, some people may find their insurance need in combined term and permanent coverage. Dual term and permanent policies make sense for people who need both high short-term coverage and a moderate lifelong “safety net.” If you have children and a mortgage, for example, you may want a 15- or 20-year plan that will pay for the mortgage and college. A permanent policy, meanwhile, will allow you to lock in lifelong coverage.

Term and permanent life insurance offer different coverage to meet different life circumstances. To find the right plan for you, compare life insurance quotes and evaluate the available life insurance policies.

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