Permanent Vs. Term Life Insurance

Overview

Life insurance is a purchase a person makes when he has others who depend on him for financial support. Because in the event of a person’s death, the person will no longer earn the funds a loved one or family is counting upon, a life insurance policy provides reassurance to the policyholder that his family will be cared for. There are two chief types of policies: permanent and term life.

Time Frame

One of the differences between permanent and whole life insurance is the time frame by which each lasts. Term life insurance is purchased for a designated time period ranging anywhere from one to 35 years. Permanent life insurance lasts for the duration of a person’s life; if premiums are regularly paid, the insurance money will pay out upon a person’s death.

Benefits

The payout for term life insurance is good for the stated value of the policy. For example, if a person purchases $100,000 worth of life insurance and he passes away while the insurance is in effect, his beneficiaries will be paid $100,000. However, a permanent life insurance policy is good for the face value of the policy, plus it features a savings component, meaning it has some cash value. The value accumulates much like a savings account–at an annual or adjustable rate of interest, which can be cashed in as it accumulates funds.

Cost

Because permanent life insurance features not only the potential payout itself, but also the savings component, it costs significantly more than term life. The difference in cost can be as much as five to 10 times as much as term life insurance. Because term life insurance holds no cash value, term life insurance is less expensive.

Misconceptions

Because permanent life insurance consists of a savings component, many purchasers consider it a better value than term life insurance because it holds cash value. However, due to costs such as insurance agent commissions, it may take as much as 10 years for a permanent life insurance policy to actually hold value. Also, the return on investment can be much less than other investment means, such as mutual funds or stocks. For this reason, many experts recommend purchasing term life insurance and investing the money you would have spent on whole life in a higher-return investment.

Considerations

Permanent life insurance is a long-term investment that takes many years to gather significant value. For this reason, it is best purchased by a younger person (provided she could sustain the monthly premiums). Another consideration for permanent life insurance is whether or not a person truly needs life insurance for the whole of their lives. When a person is older and her family has grown, she may have fewer dependents counting on her for funds–therefore, the insurance may not be needed.

However, in some ways term life insurance is a risk one bets against his life–if he outlives his policy, his beneficiaries receive nothing and the policy no longer has any value.

About this Author

Rachel Nelson is currently a managing editor for custom health publications, including physician journals. A writer for more than 6 years, she has written for the Associated Press and “Charleston,” “Chatter” and “Reach” magazines. She is currently pursuing a Master of Arts in Public Administration from the University of Tennessee.