What is term life insurance?
Term life insurance is a type of life insurance that provides coverage for a specific period of time, such as 10, 20, or 30 years, and pays a death benefit only if you die during that term. It is a simple, relatively inexpensive way to get life insurance coverage. If you die while your coverage is in force, your beneficiaries get the payout.1 If you don't, the policy stays in force until the end of the term.
For simplicity's sake, think of term life insurance like renting an apartment. There are a lot of similarities:
- You plan to use it only for a limited period of time
- It's often less expensive than purchasing
- You don't build equity
- At the end of the lease term, it's gone
In practical terms, this means term insurance provides affordable protection for a defined period but does not accumulate any cash value.
It may seem odd that anyone would purchase life insurance that ends after 10, 20 or 30 years, but there are circumstances in which it makes sense. For example:
- If you're young, you may want simple, inexpensive coverage just to pay off debts, leave money to your significant other, or absorb funeral costs.
- If you're fiscally minded, you may want to lock in a 20- or 30-year premium at a relatively low rate while you're still young and healthy.
- If you're in the final decade of your career, you may want coverage in an amount that would replace lost income if you pass away, enabling your spouse to still achieve retirement goals.
What is permanent life insurance?
Permanent life insurance is a type of life insurance that provides coverage for your entire lifetime and includes a cash value component that grows over time. It doesn't expire like term life insurance.
Cash value is the component of a permanent life insurance policy that accumulates over time and can be borrowed against or withdrawn.
If term life is an apartment you rent, permanent life insurance is the home you purchase and plan to keep for the rest of your life. Here are some similarities:
- You own it for life, as long as you pay enough premium to keep your policy in force
- You typically pay more for it
- It has equity (called cash value) that grows over time
- It's an asset you can borrow against
- It will benefit your loved ones in the future
In practical terms, permanent insurance offers lifelong protection that can serve as a financial resource during your lifetime.
Permanent life insurance is generally more expensive than term insurance, but you can put it to use as a financial tool during your lifetime.
For example, it holds a cash value that you can withdraw, borrow against or list as an asset when you are applying for credit. Many people use the cash value at crucial times — to help pay for college or as supplemental income during retirement, for example.
Types of permanent life insurance
Permanent life insurance comes in a variety of types and options:
- Whole life insurance is permanent coverage with fixed premiums and guaranteed cash value growth.
- Universal life insurance is permanent coverage with flexible premiums and adjustable death benefits.
- Variable life insurance is permanent coverage that allows you to invest cash value in sub-accounts that you choose based on your risk tolerance.
- Indexed universal life insurance is permanent coverage where interest is credited based on the movement of an index, such as the S&P 500.
In addition to choosing the type of insurance you need, determining the amount you need is very important. It is a good idea to meet with a financial professional to determine the coverage that best fits your needs — now and in the future.
Which type of life insurance is right for me?
Consider term insurance if you need affordable coverage for a specific period, such as while raising children or paying off a mortgage. Consider permanent insurance if you want lifelong protection with cash value accumulation for wealth building or estate planning purposes.
Frequently asked questions
What happens when term insurance expires?
When your term insurance policy reaches the end of its term, coverage ends and no death benefit is paid. Some policies offer the option to renew at a higher premium or convert to permanent coverage.
Can I convert term to permanent life insurance?
Many term policies include a conversion option that allows you to convert to a permanent policy without a medical exam, typically within a specified time frame.
How does cash value grow?
Cash value grows on a tax-deferred basis within your permanent life insurance policy. The growth rate depends on the type of policy — whole life offers guaranteed growth, while universal and variable policies may fluctuate based on interest crediting rates or investment performance.
