Permanent vs Term Life Insurance

If you are considering permanent vs term life insurance, there are several factors that you will need to take into account. Permanent life insurance remains in effect for as long as you keep making monthly payments, while term life insurance will automatically lapse after a certain amount of time. Each type has its advantages and disadvantages. Depending on your financial situation, one type will be more beneficial than the other. Before choosing a life insurance policy, you will have to look at your finances and decide which one suits you best.

Life Insurance Basics

When someone dies, his or her loved ones are left with many expenses. First and foremost, they have to cover the funeral costs, which can get quite expensive. They will also need to settle the financial affairs of the deceased. This can include paying off financial obligations, securing assets, and so on. Because death is often sudden and unexpected, loved ones may have little opportunity to save money for these expenses in advance.

Life insurance is designed to address that. When you die, the insurance company pays a certain sum to your beneficiaries. Beneficiaries are people whom you designate ahead of time. A beneficiary can be a spouse, a child or anyone else you entrust with handling your affairs after your demise. In addition to covering death-related expenses, life insurance can provide income to beneficiaries who cannot earn anything on their own. For example, if you have children, the life insurance can cover them until they turn eighteen.

Permanent Life Insurance

A permanent life insurance policy is designed to last for as long as you live. So long as you make monthly premium payments, the policy will remain in force. 

Permanent life insurance can be divided into two subtypes: whole life insurance and universal life insurance. With whole life insurance, the premium payments always remain the same, while with universal life insurance, the premiums go up or down depending on the market conditions.

Term Life Insurance

A term life insurance policy lasts for a certain predetermined period. That period is known as the term. As with permanent insurance, the benefits will lapse if you fail to make a premium payment at any point before the end of the term. The premiums will remain the same.

In many cases, you have a right to extend a term life insurance policy. However, doing so will allow the insurer to reset the premium and other aspects of the policy.

Permanent Life Insurance vs Term Life Insurance

In the short term, term life insurance tends to be a better deal. It will have smaller premiums than permanent life insurance would for the same period. However, if you choose the renew the term policy, the advantage can disappear fairly quickly. That is because the premiums will increase every time you renew them. The more you renew them, the more expensive the policy becomes. Depending on how long you live, it may become more expensive than permanent life insurance would have been.

Yet this may not necessarily be the case with universal life insurance. Because the premiums change depending on market conditions, they may drop lower, making it the best deal over the long run. However, they are just as likely to rise until they are higher than they would be with either term or whole life insurance. And because the markets are impossible to predict in the long run, taking universal life insurance becomes a gamble that you may not be prepared to take.