Term and permanent policies are the two main types of life insurance.
With both types of policies, you make ongoing premium payments to an insurance company. In exchange, the insurer may pay a lump sum to your loved ones if or when you die.
But term and permanent policies have important differences in how much they cost and the specifics of if or when they’ll pay out a benefit.
The key distinction between term and permanent life insurance is how long you’re covered for.
As you might guess, because permanent life insurance covers you forever, it’s more expensive than term. In fact, your annual premium can cost anywhere from five to 15 times more than similar term life insurance.
A permanent insurance policy also comes with a savings or an investment account (it may be called the policy’s “cash value”). As you pay premiums over time, the value of this account grows. You may be able to borrow against the account’s cash value or take a withdrawal from it.
|Coverage lasts||For a set term only||For life (if you keep paying the premium)|
|Is there a cash value?||No||Yes|
|What if I want to cancel my policy?||The premiums you’ve paid are gone forever||May be able to receive the policy’s surrender value to get some money back|
For many people, choosing term or permanent life insurance comes down to cost, but there are other reasons that might make one or the other more appealing.
|Replace your income only during a certain time (like until your kids reach adulthood)||Want to be certain a dependent will be taken care of no matter what|
|Want the lowest cost option||Don’t like the idea of paying premiums for something you might never use|
|Could face changing financial needs||Comfortable committing to a policy for the long haul|
|Not ready to make an estate plan||Incorporating the insurance into an estate plan|
Permanent insurance can itself come in two main types:
Usually when people talk about permanent insurance, they’re talking about whole. Variable policies can be seen as almost more akin to investment accounts.
Term and permanent policies are the two main types of life insurance. Term insurance covers you only for a set period of time and is usually the cheaper option. Permanent life insurance pays out a benefit no matter when you die and is typically more expensive. Either type of policy can help you protect your loved ones, but there are important differences to understand.