Understanding the Difference Between Term and Permanent Life Insurance

December 22, 2023

Life insurance is a crucial financial tool that provides financial protection to your loved ones in the event of your passing. When exploring life insurance options, two primary categories emerge: term life insurance and permanent life insurance. Each type serves different purposes and comes with its own set of features and considerations. Let’s review the key differences between term and permanent life insurance to help you make an informed decision based on your unique needs.

1. Duration of Coverage

Term Life Insurance: This type of insurance provides coverage for a specified term, typically ranging from 10 to 30 years. If the policyholder passes away during the term, the death benefit is paid out to the beneficiaries. If the policyholder outlives the term, the coverage expires, and no benefit is paid.
Permanent Life Insurance: As the name suggests, permanent life insurance coverage for the entire lifetime of the policyholder. It does not expire as long as the premiums are paid. This type includes various subtypes such as whole life, universal life, and variable life insurance.

2. Premiums

Term Life Insurance: Generally, term life insurance has lower premiums compared to permanent life insurance. The premiums remain level throughout the term but may increase upon renewal.
Permanent Life Insurance: Premiums for permanent life insurance are typically higher than those for term life insurance. However, a portion of the premium goes towards building cash value, which can be accessed or borrowed against during the policyholder’s lifetime.

3. Cash Value Accumulation

Term Life Insurance: Term policies do not accumulate cash value. Once the term ends, the coverage terminates, and there is no residual value.
Permanent Life Insurance: One of the distinguishing features of permanent life insurance is the cash value component. A portion of the premium paid goes into a cash accumulation account. This cash value grows over time and can be utilized for loans, withdrawals, or even as a source to pay premiums.

4. Flexibility

Term Life Insurance: Term policies are straightforward and provide pure death benefit protection. They are suitable for those who need coverage for a specific period, such as during the years of a mortgage or until children are financially independent.
Permanent Life Insurance: Offers more flexibility, allowing policyholders to adjust death benefits, premiums, and access cash value. This makes permanent life insurance more adaptable to changing financial needs and long-term planning.

5. Cost Considerations

Term Life Insurance: Initially, term life insurance is more cost-effective, making it an attractive option for individuals seeking affordable coverage for a specific period.
Permanent Life Insurance: While the premiums are higher, permanent life insurance can be seen as an investment, as it builds cash value over time and provides lifelong coverage.

Choosing between term and permanent life insurance depends on your individual financial goals, preferences, and circumstances. Term life insurance is often favored for its simplicity and affordability, while permanent life insurance offers lifelong coverage and a savings component. Understanding these differences will empower you to make an informed decision based on your unique needs and financial objectives.

Sablich Insurance Group is licensed in both Pennsylvania and New Jersey.