Term vs Permanent Life Insurance in Plain English

Almost every life insurance decision starts with one question: term or permanent? The industry tends to complicate the answer. The two types do different jobs, and once you know which job you need done, the choice usually settles itself.

Term life: coverage for a window of time

Term life insurance covers you for a set number of years. Ten, fifteen, twenty and thirty year terms are the most common. You pay a premium, which on most policies stays level for the whole term. If you die during the term, your beneficiaries receive the death benefit. If you outlive the term, the coverage ends and nothing is paid.

That is the reason term is affordable: you are paying only for protection, the way you do with home or auto insurance. For the same premium, term buys a much larger death benefit than permanent coverage does.

Term fits needs that have an end date:

• Replacing your income until the children are grown
• Covering a mortgage or a business loan until it is paid off
• Protecting a business during the years a key person or a partner is hardest to replace

Permanent life: coverage for a lifetime

Permanent life insurance is designed to stay in force for your whole life, as long as premiums are paid. It also builds cash value, a reserve inside the policy that grows over time and that the owner can generally borrow against or withdraw from, within the policy's rules.

The main types:

• Whole life. Fixed premiums, a guaranteed death benefit, and cash value that grows on a schedule set by the carrier. The most predictable, and usually the most expensive.
• Universal life. Flexible premiums and an adjustable death benefit. The flexibility is useful, and it also means the policy needs watching: if too little is paid in, or the policy's assumptions do not hold up, it can run short later.
• Indexed and variable universal life. Versions whose cash value growth is linked to a market index or invested in market subaccounts. More moving parts, and more reason to review the policy every year.

Permanent coverage fits needs that do not end:

• Creating cash for an estate so heirs do not have to sell a business or a property
• Funding a buy-sell agreement between owners who plan to stay in business indefinitely
• Providing for a dependent who will need support for life
• Leaving a set amount to children or to a charity no matter when you die

The question that decides it

Ask: when does the need end?

If you can name a date (the last child finishes school, the loan is paid, the succession plan is complete), term is usually the right tool. If the honest answer is "it does not end," you are looking at a permanent need.

Many families have both kinds of need at the same time. A common design is a large term policy for the years when income replacement matters most, with a smaller permanent policy underneath for the needs that last. That matches each dollar of premium to the job it does best.

Conversion: the feature people forget

Many term policies include a conversion privilege: the right to exchange some or all of the term coverage for a permanent policy with the same carrier, without new medical underwriting, up to a deadline stated in the policy. If your health changes during the term, that right can be worth a great deal.

Conversion rules differ from carrier to carrier: which permanent products are available, how long the window stays open, and whether partial conversions are allowed. When we design term coverage, the conversion terms are part of the comparison. It is one reason we place term cases across eight carriers rather than defaulting to whichever is cheapest that week.

Common mistakes

• Buying on price alone. The cheapest term policy may have the weakest conversion terms.
• Letting term expire without a plan. If you will still need coverage when the term ends, the time to act is years before, while conversion is still available.
• Buying permanent coverage you cannot sustain. A permanent policy that lapses in year eight because the premium was a stretch has served no one.
• Never reviewing it. Needs change. Universal life policies in particular should be checked against their original projections. Our 75-45 Day protocol exists for this reason: a market audit starts 75 days before a premium is due, and the client review lands 45 days before.

A note on taxes

Death benefits are generally received free of income tax, and cash value generally grows tax deferred under current law. How those rules apply to you depends on who owns the policy, how it is structured and how you use it. We design the instrument. Your CPA and attorney confirm the tax and legal treatment.

FAQs

Is term life a waste of money if I outlive it?

No more than fire insurance was wasted because the house did not burn. You paid for protection during the years your family was exposed, and you got it.

Is permanent life insurance an investment?

It is insurance first. The cash value is a real feature with real uses, but a permanent policy should be bought because you need the death benefit for life. If you do not, term is usually the better answer.

I bought a policy years ago. How do I know if it is still right?

Have it reviewed. A review looks at what the coverage was meant to do, whether that need still exists, and whether the policy is performing as projected. Nothing changes unless you decide it should.

Want a second look at your own coverage? Request a private consultation. A Senior Partner replies within two business hours.