August 23, 2023

What’s the difference between term and permanent life insurance?

Who needs life insurance? And why? If you are looking to get a baseline understanding before you talk to an advisor or look to buy a policy, let’s dig in.

Here’s a guide to how life insurance works and what you might want to talk to a Prospr advisor about.

What is life insurance?

Let’s start with the basics. Life insurance is a contract between you and a life insurance company.

Your side of the contract says you will pay the agreed upon amount each month or year (the premium) for your life insurance policy. The life insurance company’s side of the contract says that when you die, they will pay a cash payment (called the death benefit) to your chosen beneficiary or beneficiaries (i.e. who you have chosen to receive the money). In most cases this payment is received tax-free.

So why do people get life insurance? What are the benefits?

The main benefit of getting a life insurance policy is that your loved ones (the beneficiaries) can use the money (death benefit) any way they want. That means when you die, your loved ones can pay the bills without worry.

Many people choose to buy life insurance to protect their legacy, too. For example, life insurance can help your family members, business partners, or even charities listed as beneficiaries.

There are two main types of life insurance: term and permanent

Remember that contract between you and the life insurance company? With term life insurance, the contract lasts for a specific amount of time, whereas with permanent life insurance the contact lasts for your whole life.

Let’s look at the basics about term insurance before we get into how permanent insurance works.

How does term life insurance work?

Term life insurance can be a great choice for people who want affordable, short-term coverage. It’s ideal for young families, homeowners with a mortgage and business owners.

The up-sides	Potential down-sides
It's usually the least expensive kind, especially the younger you are. You can choose your term length, such as 10, 20 or 30 years. It’s a good way to protect something specific, like a mortgage or even a business loan.	Coverage is temporary. The premium goes up if you renew when the term ends. You’re only covered while you have the policy (i.e. there is an end date). Adult children are financially dependent on parents longer than ever, so you may still want to have coverage even after your term policy expires or after your term renews at a higher premium.

Here’s a quick example of how term life insurance works:

You buy a 30-year term policy to protect your family in case something were to happen to you.
You’re covered as you pay down your mortgage and raise your kids. If you were to die, your family would receive a tax-free cash death benefit to use for whatever they need.
When the 30 years is up, maybe your mortgage is paid and the kids have left home, so you may decide you don’t need a life insurance policy. Or, you may still need coverage – in which case, you can let your policy renew or consider converting to a permanent policy.

And how does permanent life insurance work?

Permanent life insurance is a great choice for people who are looking for lifelong coverage. Many permanent plans offer an added bonus of growing a cash value that may increase your death benefit, or that you might even be able to borrow against.

The up-sides	Potential down-sides
Lifetime coverage that continues even if your health changes. For many plans, a cost guaranteed never to go up. An opportunity for your policy’s cash value to grow over time. Can be more cost effective as you get older. There are different types of policies to match your specific goals. Life expectancy has increased over the years, which makes this an increasingly attractive option because coverage is lifelong and does not expire at a set age.	It typically has a higher initial premium than term insurance. It can be more complex than term. But don’t worry, Prospr advisors are here to help explain all of the details.

The up-sides

Potential down-sides

Lifetime coverage that continues even if your health changes.
For many plans, a cost guaranteed never to go up.
An opportunity for your policy’s cash value to grow over time.
Can be more cost effective as you get older.
There are different types of policies to match your specific goals.
Life expectancy has increased over the years, which makes this an increasingly attractive option because coverage is lifelong and does not expire at a set age.

It typically has a higher initial premium than term insurance.
It can be more complex than term. But don’t worry, Prospr advisors are here to help explain all of the details.

Another option: convert your term to permanent

Not ready for permanent life insurance yet? Another thing you could think about is converting your policy. Many term policies offer you an option to convert to a permanent policy down the road. If you're considering this strategy, remember to confirm that the insurer you choose has eligible permanent products that suit your needs.

So which type of life insurance is best for you? And importantly, how much could it cost? Talk to a Prospr advisor to go over your specific circumstances today.