A look at Term Insurance vs. Permanent Insurance

Understanding the differences between term insurance and permanent insurance will help you to choose a product that best reflects your risks and your needs.

Term Insurance provides a fixed amount of coverage typically for periods of 10 and 20 years and then expires when the owner reaches a certain age (i.e. 85). After each specified period or “term,” the insurance renews automatically and the cost of the insurance renews at an increased premium.

This type of insurance is inexpensive, and is meant to be temporary. Like home and auto insurance, the owner of this type of insurance pays premiums to secure a specific risk and does not receive any return of premium when it is cancelled or expires.
 
Permanent Insurance provides coverage for one’s entire life at a fixed premium. There are generally two types: whole life and universal life.

Whole Life is permanent insurance. It has a guaranteed cash value that is managed by the insurance company. Participating policy holders also share in the profits of the insurance company and receive annual dividends. Dividends can then be allocated to paying the policy’s premium or purchasing additional paid-up life insurance.

Universal Life is permanent insurance where premium payments in excess of the current cost of insurance are credited to the cash value of the policy. The policy holder, therefore, manages the funds. These funds are tax deferred and can be used to help pay the premiums as desired by the owner.    

The graph below depicts a premium comparison of 10 year term, minimum funded level cost universal life and whole life insurance. The subject for this comparison is a 35 year old male, non-smoker, at standard rates applying for $250,000 in coverage.

In this specific case, term insurance premiums start off much lower than the two permanent policies. At age 55 the term premium increases and becomes more expensive than the universal life policy. At age 65, the term renews once again and rises above the premium for the whole life policy. At age 85, the term insurance expires. Term insurance is inexpensive because of its temporary nature, and should be used to secure risks that are also temporary.  

From age 65 and on, the two permanent insurance policies start to reveal their value. The benefit is due to the premiums remaining fixed for the life of the policy. While, in the early years, they require more premium dollars, these policies make up that lost ground in the later years, when the cost of term insurance is excessive. Permanent insurance is an estate planning tool.  It is designed to be paid out to a beneficiary who will receive this death benefit tax free as part of a deliberate estate plan.

Simply put, term insurance is designed to secure a temporary risk and hopefully will not be needed. Permanent insurance is designed to pay a benefit to a beneficiary as part of an estate plan.

 

 

*This example is not complete without the issuing company’s life insurance illustration including the cover page, reduced example and product features pages having the same date.