Term vs. Permanent Life Insurance

in Financial Planning, Financial Planning-RSS, Personal Finance Essentials by

Life insurance can be complex and overwhelming, especially with the myriad insurance policies out there. It’s important to know the differences between them since each type has unique characteristics that may be beneficial – or unnecessary – to your own needs. However, more often than not, shopping for policies can get confusing. When it comes to life insurance policies, they can commonly be broken down into term vs permanent life insurance. Here are some of the main characteristics of the two types.

Term Life Insurance

As the name indicates, term life insurance provides coverage for a specified amount of time – usually from 10 to 30 years, with 20 being the most common. Once the term period ends, your coverage ends. If you pass away prior to the term period ending, then your beneficiaries get the face value of your policy. It’s important you consider the length of the term carefully; be sure it covers your dependents until they no longer need support. It can be very expensive — or impossible to renew term insurance later if your health situation changes.

Term insurance generally costs less than other – more permanent insurance – and carries a predetermined premium. You will want to compare rates and coverage to ensure you’re getting the best policy for your needs.

Permanent Life Insurance

Permanent life insurance provides lifelong protection for the insured. This type of policy usually comprises an insurance product coupled with a savings or investment component. Your insurance company invests part of your premium and your cash value is then built up by the accrued interest. The growth is generally tax deferred and can be accessed over the life of the policy, with some constraints.

These types of policies tend to have larger upfront costs with higher premiums due to the extended coverage period and investment component. Investment choices offered through the policy tend to be high cost and inefficient, which may offset the potential tax benefit. Permanent life insurance is generally not necessary for most people’s financial planning needs; however if you’re interested in estate tax mitigation, financial legacy enhancement, or have pre-existing health issues, permanent life insurance may make sense for you.

Personal Capital Strategy

We generally recommend that if you are in normal health, term life insurance is preferable to permanent life insurance. Your circumstances, however, are unique to your own life, and you should speak with your advisor to determine what kind of life insurance is right for you.

When you use our free tools to input your financial information, we can recommend a level of insurance coverage to help keep you and your family protected and on track for your long-term goals.

Read our free Personal Capital Insurance Guide to learn more about term vs permanent life insurance

Personal Capital Insurance Series
Life Insurance – How Much Do I Need?
Whole vs Universal Life Insurance
Do I Have to Buy an Annuity?

All insurance analysis and insight provided is extended to you as a courtesy for educational purposes only. You should not rely on this information as the primary basis of your insurance planning decisions. We are not licensed insurance professionals. You should consult a qualified licensed insurance professional regarding your specific situation.

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Matt Lenore

Matt Lenore

Matt Lenore is a Research Associate at Personal Capital. He left a traditional portfolio manager to join Personal Capital to be part of revolutionizing the wealth management industry. When he's not trading, he loves tracking the markets and scheming about investment strategy. He graduated cum laude with a degree in economics from Brandeis.
Matt Lenore

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3 comments

  1. Alex

    What do you think of permanent life insurance policies that are pitched as investment vehicles? They can make up a low return part of the bond/non-correlated portion of a portfolio. They also give an increasing death benefit and/or a decreasing premium over time. Are they a good deal?

    Reply
  2. Steele Honda

    I believe that my brother needs to get a permanent life insurance as he might have some pre-existing health issues. He is now looking for a proper insurance but cannot find one as he has almost no experience in this market. I will make sure to advise him this option as it seems quite reasonable to me.

    Reply
  3. Ashley Maxwell

    Thanks for mentioning how permanent life insurance is usually used when you have savings. I like how you said that the term option can cover you for the amount of time that you specify. My husband and I are considering looking into getting life insurance that would cover us for the time that we need.

    Reply

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