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Term and permanent life insurance
Life insurance helps your loved ones maintain their quality of life in the event of an untimely death and can also provide retirement and other benefits to you during your lifetime.
Life insurance comes in many different forms. Some policies offer protection for a specific term, while others offer coverage for the long term.
Both types can provide financial protection to your family, but they differ in terms of coverage, duration, features and benefits. As you consider which policy may be right for you and your loved ones, it’s important to understand the key differences between term life insurance and permanent life insurance.
In this article:
What is term life insurance?
Term life insurance provides coverage for a set period of time. With this type of policy:
- You select the duration, or term, of your policy — usually 10, 15, 20 or 30 years.
- You select the death benefit amount.
- The premiums you pay generally stay the same throughout the term.
- Your beneficiaries will receive a payout (as long as premiums are paid as agreed), also known as a death benefit, from the policy only if you die during the term of the policy.
- Once the term is up, your policy expires, and you must renew it or purchase a new one. Keep in mind, if you renew or purchase a new policy, your premium rates may likely increase.
- Term life insurance can be a cost-effective way, albeit for a specific time period, to provide financial protection for loved ones.
- Some term policies allow you to convert some or all of your coverage into a permanent policy within a specified time period without additional medical underwriting.
What is permanent life insurance?
Permanent (or cash value) life insurance provides coverage until death, as long as your premiums are paid on time. With this type of policy:
- Your coverage doesn’t expire if you continue to pay premiums.
- Your policy can grow cash value, tax deferred, in addition to offering a death benefit.
- You can borrow cash from your life insurance policy tax-free to meet other financial needs and goals. There are impacts this can have on the policy.
- Offers flexible features and benefits including how cash value grows.
What are some of the pros and cons of term and permanent life insurance?
Term life insurance
| Pros | Cons |
|---|---|
| If your goal is shorter-term coverage, you can choose the duration or specific term of coverage. | Once your policy expires, so does the death benefit. |
| Typically offers lower monthly premiums than permanent. | No cash value. |
| If your policy includes a convertibility clause, you can convert your term policy to a permanent policy within a specified time period without additional medical underwriting. |
Once the policy expires, if you want to renew coverage you will need to do one of the following:
|
Permanent life insurance:
| Pros | Cons |
|---|---|
| Life-time financial protection and premiums won’t increase. | Monthly premiums can be more expensive than term. |
| Your policy has the potential to grow cash value, which accrues interest on a tax-deferred basis over time. | Policy can take 10+ years to build enough cash value to borrow from. |
| You can borrow from your cash value, income tax free, if you need it. | Accessing policy cash value through loans and surrenders may cause a permanent reduction in policy cash values and death benefit and negate any guarantees against lapse. |
Various personal factors such as your age, pre-existing health conditions and daily habits (like smoking) are also taken into consideration when your monthly premium amount is set. This may be a pro or a con, depending on your situation.
Your financial advisor can help you better understand the benefits of term and permanent life insurance — and how they pertain to your personal situation.
When should I buy life insurance?
While there is no one-size-fits-all timeline for when to buy life insurance, several factors can help you determine when you may want to consider it. In many cases, the younger you are when you purchase life insurance, the more benefits you get out of your policy. Here are a couple of reasons why:
- Generally, the younger you are when you purchase a life insurance policy, the more likely you are of securing a lower monthly premium.
- If you choose to purchase permanent life insurance, starting earlier gives you more time for your cash value to grow.
How do I decide which policy is right for me?
Life insurance can provide valuable financial security for your family once you are gone. When you’re considering term or permanent life insurance, it may be helpful to ask yourself the following questions:
- If you have children, how old are they? How long do you want them to be covered by the protection of a death benefit should you pass away?
- Will you have lifelong dependents (e.g., a child with disabilities who will need extra care)?
- Do you have any debt, like a mortgage, car loan or credit card debt?
- How might you/your family’s needs change over time?
- How much of a financial burden would your family face if you died unexpectedly?
- Do you want to leave a legacy to family or charity?
- Are you or will you be concerned about estate taxes?
Before purchasing any life insurance policy, it’s important to talk to an Ameriprise financial advisor so you can make a decision that is right for you.
Or, request an appointment online to speak with an advisor.
At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's.
If you know someone who could benefit from a conversation, please refer me.
Background and qualification information is available at FINRA's BrokerCheck website.