Term vs Permanent Life Insurance Explained Simply For You

 

The two options available for making the right choice in life insurance relate to term and permanent life insurance. Both types give the security of finances to any member of your family left behind, yet they work very differently from each other and have different benefits and costs attached to them. Knowing the main differences between term and permanent life insurance can help you make the best-informed decision suited to your needs and financial goals.

This guide will cover what term life insurance and permanent life insurance are, how they work, and how their costs, levels of flexibility, and coverage differ. This article will provide a comprehensive review of the two major types of life insurance that are now available, whether you are just starting on your life insurance journey or want to review your current policy.

What Is Term Life Insurance?

Term life insurance is one of the simplest and cheapest types of life insurance available. It pays out a death benefit if the policyholder dies during the term selected, usually 10, 20, or 30 years. Once the term expires, the coverage stops, and there is no payment of a death benefit.

The appeal to term life is simply that they are easy, cost-effective types of insurance products. Since a policy does not acquire cash values, the payment made for obtaining premiums is also pretty low. Such policies might include term life policies when needed during a limited period mortgage or after kids are done living at home, for instance.

How Does Term Life Insurance Work?

Upon purchasing a term life insurance policy, one chooses a certain coverage amount and term length. The insurance company will thus give you a quote on various factors such as your age, health, and lifestyle. In case you die during the term of your policy, the death benefit previously agreed with your beneficiaries will be given to them.

It is worth noting that term life insurance is a "pure" form of insurance. There is no accumulation of cash value over time. Therefore, once the term is completed, the coverage will lapse, and you will not receive any returns on your paid premiums.

Term Life Insurance Cost

Generally speaking, the expense of term life insurance is established by the policyholder's age, health, and the value of the policy. Since there is no cash value component of term life, it is always much cheaper compared to permanent life insurance. However, premiums are still within reach for most; they can even be as cheap as $20 to $50 per month in a healthy 30- to 40-year-old, all depending on how long the coverage is needed for and the actual amount of insurance.

The premium of a term life insurance, however increases with age. When the term expires, one can renew this policy. And as a rule, renewal always involves higher payments since one gets older and sometimes not so healthy.

What Is Permanent Life Insurance?

Permanent life insurance can be another style of life coverage that provides benefits for a whole lifetime. However, permanent insurance does not include the term element, meaning your policy will last for your life if you don't stop premium payments. Hence, it extends coverage for any period of the death benefit to pass on to their beneficiaries.

Like in permanent protection, permanent life policies have a cash value component which means part of the premiums one pays goes to a cash account that grows through time. He or she could borrow against, withdraw, or use it as a source for paying premiums from this cash account.

How Does Permanent Life Insurance Work?

Permanent life insurance is varied in form such as whole, universal, and variable life insurance. As these may be distinguished based on their investment option and premium, the underlying forms remain similar to lifetime coverage together with the element of cash value.

Permanent life insurance tends to charge more premiums compared to term life insurance. Still, for most people, cash value growth and lifetime coverage will make it all worthwhile. With permanent life insurance, the cash value builds over time and could present an opportunity to access liquidity by borrowing against it or using it to reduce premium payments.

Permanent Life Insurance Cost

Permanent life insurance is generally more expensive than term life insurance because it is designed to last for a lifetime and also carries a cash value. The price of permanent life insurance varies with the type of permanent insurance chosen, age, health, and coverage amount. The average premium cost for a permanent life insurance policy is $200 to $1,000 or more per month.

The premiums may seem overwhelming at first, but they are locked in for life, and you can access the cash value as it grows. This does make permanent life insurance more of an investment, but over the long run, the benefits can outweigh the higher premiums, especially in a situation where you want lifelong coverage.

Term vs Permanent Life Insurance: Key Differences

Now that we’ve defined term life insurance and permanent life insurance, let's take a closer look at the key differences between the two.

Coverage Duration

The most apparent difference between a term life insurance policy and permanent life insurance is the term. Term life covers you for a term, be it 10, 20, or 30 years. If you live past the term, there is no death benefit paid, and the term ends. Permanent life insurance covers you for your entire lifetime if you keep paying the premium. It also provides a guaranteed death benefit that will be paid to your beneficiaries when you die.

Cost

As mentioned earlier, term life insurance is relatively cheaper than permanent life insurance. This is because term policies do not have any cash value accumulation, and it only covers a certain period of time. Permanent life insurance has higher premiums since it is a lifetime policy, and the cash value adds to the premiums. 

Cash Value

One of the greatest differences between term life and permanent life is that permanent life provides a cash value component that one can build up over time. This may be borrowed or even used for the payment of premiums. The opposite is the case with term life insurance: there is no cash value associated with it; it is strictly an insurance product where coverage will exist only during the specified period and no fund accumulates.

Flexibility

Flexibility is another factor that is important to compare term life insurance vs permanent life insurance. Permanent life insurance is generally more flexible, and the death benefit may be changed, the premium payment schedule altered, or even access to cash value. Term life insurance, on the other hand, is less flexible in general.

Conclusion

Both types of life insurance, term and permanent, provide excellent insurance benefits to the family left behind, but they serve different purposes and varied budgets. Knowing about the differences between term life insurance and permanent life insurance is important before choosing which would be best for you.

If you remain unsure which policy is best suited for your budget, it helps to speak to a licensed agent or financial consultant who can give you the tools and guidance required to make that informed decision. Whether you prefer term life insurance for its low cost or permanent life insurance for its lifetime protection and cash accumulation, you have the assurance of knowing that your loved ones will be cared for after you're gone.

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