If you are in the market for life insurance policies, what you are looking for is a way to provide financial protection to your family after your demise. With so many options available you might be thinking which one is right for you.
Well! In your initial research, you may come across Term Life Insurance vs Permanent Life Insurance policies. Both types of life insurance give financial assistance to the designated beneficiaries, but there are a lot of differences between them. Understanding these differences will help you choose the best coverage according to your budget and requirements. This guide will explore the difference between these two life insurance types and tell you which one is cheaper for you.
Understanding Term Life Insurance vs Permanent Life Insurance
What is Term Life Insurance?
Term Life Insurance is a type of insurance policy that expires after a predetermined time frame. It usually lasts about 10, 20, or 30 years depending upon your coverage. The policy allows you to select the length of your plan’s coverage as well as the amount of the death benefit that your beneficiaries will receive after your demise.
However, it is recommended to reevaluate your term life insurance plan before a year it’s set to expire. In this way, you have enough time to evaluate other available options. On the other hand, some insurance companies permit you to renew your policy or you can convert it to a permanent life insurance policy instead of letting it expire. But if you let your policy expire, it will end and you don’t have to pay any premium further as well as there will no longer be a death benefit for your beneficiaries.
So, might be you thinking why would someone go for a life insurance plan that expires? The reason is term life insurance policies are generally cheaper as compared to permanent life insurance. In addition, many people want life insurance plans only for a certain time like when their children are young or studying. For such people, term life insurance stands the best.
What is Permanent Life Insurance?
A type of Life Insurance Policy that remains in effect throughout your whole life is called permanent life insurance. As long as you pay the premiums, your lump sum amount is guaranteed to pay out to your aligned beneficiaries. However, permanent life insurance plans are significantly more expensive than term life insurance plans. But it will be worth it for those who want life-term coverage.
Unlike term life insurance, permanent life insurance plans also have a cash value option. That means as you pay the premium, money accumulates in your savings account through which you can earn interest or returns. When a sufficient amount accumulates in your cash-value account, you can pay your premiums from it. Additionally, you can borrow money from that account while using the accumulated cash value as collateral.
Permanent life insurance comes with three main types including:
1- Whole Life Insurance
With this policy, you get a life insurance plan along with a cash value component that serves as a savings account. You can also earn interest on the cash accumulated in your policy’s cash value component.
2- Universal Life Insurance
It’s a type of permanent life insurance that offers you a cash value component. Your cash value can earn returns depending on how your investments perform in the market. Moreover, you can also adjust your death benefit with this type.
3- Variable Life Insurance
It is one of the most flexible types of permanent life insurance but usually comes with higher risk. You have a life insurance plan and invest your cash value as you want, but the problem is if your investments don’t perform well, the losses will be compensated by your death benefit.
Term Life Insurance vs Permanent Life Insurance: Which One is Cheaper
Typically, term life insurance is less expensive than permanent insurance particularly when you get it at a younger age. It would be cheaper for both men and women regardless of gender specification. However, average rates for whole or universal life insurance are much higher when compared.
Term Life Insurance vs Permanent Life Insurance: Which One is Best
When comparing Term Life Insurance vs Permanent Life Insurance to check which one suits your requirement best, you may have to consider:
- Duration of the policy and,
- The cash value component of the policy
In case you want coverage for a specific time like when your children are financially dependent on you or maybe you are actively paying some debt or mortgage, you should go with term life insurance. On the other hand, if you have some lifelong need like a child with special needs, you may opt for the long-lasting coverage offered by permanent life insurance.
The cash value option of permanent life insurance will act as an investment vehicle, but you have to pay higher premiums for this type. Another option to consider while deciding is whether the cash value account is worth it or whether you would invest outside your insurance plan.
Comparison between Choosing Term Life Insurance vs Permanent Life Insurance
What are the reasons for choosing term life insurance?
When you are looking for life insurance with a tight budget, you can get term life insurance, a cheaper option than a permanent insurance plan.
Here are some reasons why people choose term insurance:
- Lower Premiums: The policy is generally five to ten times cheaper than permanent life insurance. If you can’t manage high premiums every month, term life would be your go-to option.
- Settled Money for Particular Financial Goals: You may want your family not to get saddled with some specific expenses after your sudden or early demise. It might be educational expenses, paying off a mortgage or a home loan, or anything else. If so, you can do it with term life insurance as it would help when you are not with your loved ones.
- Convertible to Permanent Insurance: Some people buy term life insurance intending to buy permanent life insurance when they can afford it. But now many insurers allow you to convert term life insurance into permanent life insurance whenever you can afford the premiums.
What are the reasons for choosing permanent life insurance?
No doubt, these policies are much more costly, but they come with a never-ending time frame and also offer a saving or investment option for your premiums. With interest or dividends, you can pay your premiums of permanent life insurance.
Furthermore, maybe you want this insurance plan for these reasons:
- Permanent Coverage: If you are concerned about having entire life insurance coverage, permanent life insurance may be the way to go as it offers you permanent coverage.
- Savings or Investment Option: Whether you go for a whole life insurance plan or a variable insurance policy, you have an option of investing your cash value into the market. In this way, the policy offers you a savings or investment option
- Cheaper Coverage for Young People: Buying the policy when you are still young will cost you much cheaper as compared to when you are 50 or older. This is because younger people are fit and healthy and they have fewer chances of dying as compared to old people.