What is Term vs. Permanent Life Insurance?

Life insurance policies take many forms with many different options for coverage amounts, add-on features, premium rates, and death benefits—but there are two main life insurance categories: term-based life insurance and permanent, whole life insurance. As new applicants surge in Statista studies, they often wonder about their differences, similarities, and which they should ultimately choose for themselves and their loved ones.

Similarities within Term and Permanent Life Insurance Policies

Like any policy—whether home, auto, or pet insurance—term and permanent life insurance plans share a common goal: to protect you from financial disasters and the burdens of accident and misfortune. The shared aim of these life insurance forms is to protect those who need your income most and who stand to lose tremendously if you leave behind unresolved debts and responsibilities.

Payment Structure and Guaranteed Benefits

Each month, life insurance policies—whether permanent or term—ask that you pay the agreed premium. The cost of the plan itself will differ between the two, but the overall structure is the same. In addition, what you pay for (such as certain add-ons, features, and benefits) may change, but they both require consistent payment to stay active and get guaranteed death benefits for your beneficiaries.

With both plans, death benefits are guaranteed: you don’t run the risk of losing your coverage with either. Instead, you can always count on your insurance plan to provide for your dependents, spouse, or family when it’s needed as long as you pay (and stay within the time period with term insurance).

With these similarities, term versus permanent insurance is mostly a comparison of plan benefits, costs, and features (when applicable). While permanent and term life are, as two kinds of life insurance, similar in the benefits they guarantee and how you pay for them, the differences are several.

Differences between Term and Permanent Insurance Plans

The greatest difference between term and whole life (or permanent insurance) is the length of time that you are covered. With a permanent policy, you are promised coverage for your entire life—as long as you make your premium payments faithfully. That means that your beneficiaries will receive your death benefits no matter your age at the time of death, unlike a term life insurance plan.

With term life insurance, you choose a period that is most suitable to your circumstances, usually in increments of five years (though some insurers offer more flexibility). For example, you can choose a 10-, 20-, or even 30-year term to protect your spouse and dependents during crucial years. This suits people who are taking on big responsibilities like buying homes or financing their children’s education during that time.

Monthly Premiums and Costs

Permanent life also differs from term-based policies in its price, and it’s one reason the term format remains a popular, affordable way to protect families with life insurance. In fact, pure and permanent life insurance usually prices five to 15 times higher than the average term premium. With some permanent policies, such as whole life insurance, the premium is always “level” which means that it won’t increase periodically when the insurer chooses.

By comparison, term premiums range from $25 to $35 dollars per month on average, but it only lasts for a certain number of years. Once the level period is over the insurance premium will increase on an annual basis. Typically, this still works well for people starting a career or while still in the workforce, but they will miss out on some features and add-ons given by a permanent policy’s higher cost compared to term plans.

Insurance Plan Add-ons and Features

Permanent life insurance comes with the ability to add certain financial and investment features that can accumulate cash value over time. Some policyholders like the idea that they can earn interest based on a rate set by their insurance company so that they earn a greater death benefit for their families in the event of their passing. These benefits are as guaranteed as the death payout amounts that Statista says policyholders usually choose.

Term policies don’t carry the option to accumulate cash value (or borrow against it as some providers allow). You won’t, in other words, be able to use your policy as a form of investment, but you will pay a much lower price for death benefits that are guaranteed during the years the policy is valid.

Converting Term Life Insurance Plans into Permanent Policies

With term policies, some fear that they may want to keep their coverage once the period of 10-, 20-, or 30-years has elapsed. Many insurance companies take this into account and offer the option to convert the policy into a whole life insurance plan with certain conditions and costs. Unfortunately, it’s not as simple as extending the term as needed.

For example, you can simply continue your term policy until you reach an advanced age between 80 or 95 years. This is a general range, and the specifics will depend on the insurance company you choose, but you will pay an increasing premium to keep your death benefits running beyond the original term.

Extending the low premium of term life insurance beyond the time frame it was set for isn’t usually an option because of the certainty that your policy will result in payout for the insurance company. They determine what the cost to insure you will be based on your health, and some providers will ask for more information, records, and exams to insure you fairly and in a profitable way.

Is Term Life or Permanent Insurance Better for Me?

With term vs. permanent life insurance, it’s really a matter of your preferences and needs to decide which is better for you. Think about the number of years you want to cover and the ideal situation for your dependents and loved ones if your policy is activated. Then, consider whether you’re interested in the simplest and most low-commitment option or if you’re seeking an investment component. Best Term Life Insurance Candidate Venn diagram

Best Term Life Insurance Candidate

Term life insurance tends to work better for people who want to keep premiums low and have several people depending on them without significant resources otherwise. This is the typical profile of the term life insurance applicant:

  • Starting a career or in the workforce
  • Supporting spouses, children, and others
  • Living without significant savings or safety nets
  • Carrying unresolved debts and financial liabilities

Ideal Permanent Life Policyholder

This compares to the best candidate for a whole life policyholder with some areas of overlap:

  • Nearing the end of their career and looking ahead
  • Desiring to benefit independent children and comfortable spouses
  • Using enough financial resources and assets to afford higher premiums
  • Adding additional investments to their portfolio through life insurance

Deciding between Permanent and Term Life

If you relate to one of these categories more than the other, you may already have an idea of which policy would be better for your lifestyle and financial situation. But, if you need a more structured approach consider these questions to help you work through the best life insurance plan for you and your beneficiaries:

  • What are my reasons for getting life insurance? Some policy applicants simply want to avoid disaster during key years after buying a house or making other important decisions. Others want to know their family will receive benefits whenever they pass away to help lessen the blow.
  • How do my finances look now and in years to come? Understanding your financial life will help you decide how much life insurance you can afford, but it can also help you decide which kind of policy is most sustainable to ensure you can always make your premiums and settle the cost.
  • What benefits do I desire in a life insurance policy? Most people use life insurance simply to promise payments after their death in a simple lump sum. But, the option to invest exists for those who choose a permanent, whole life policy, so the choice of benefits counts when making a decision.

Once you know what kind of policy to secure based on these reflections, you can start to hunt for quotes that make sense for the benefit amount you need or desire. Ultimately, the best policy for you—term or permanent—will be the one that serves your true purpose and remains reasonable for your budget so it stays active and guaranteed.

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