Permanent vs. Term Life Insurance: What’s the Difference?
You likely know someone who has life insurance. According to a 2016 LIMRA study , three out of five Americans have at least one life insurance plan. What's more, the same study revealed that 66 percent of Americans say they would recommend life insurance to someone else—a statistic that's up 11 percent from the previous year. What do these statistics mean? Americans are increasingly choosing life insurance.
Once you've decided to buy life insurance, the next step is to research the type of life insurance policy that works best for you and your family. There are generally two types of life insurance you can choose from: term or permanent. We'll help you compare these two types of life insurance so you can make the best choice for your family. Which could be right for you: term life insurance or permanent life insurance?
What is Term Life Insurance?
Term life insurance is a policy that lasts for a set period of time or "term," like 6 months, 12 months, or longer. It guarantees a predetermined level of coverage for this period of time as long as you comply with the policy provisions and the premium payments are made. Should the unthinkable happen within the term, the term life insurance policy would pay beneficiaries that set amount of money, which they could use to help with your final expenses and/or for their current and future needs.
Term life insurance can help bring peace of mind to families (and breadwinners) who may be going through a transition. Starting a new season of life can make some people feel vulnerable, especially if their family relies on them to be the primary source of income. In the event of the unthinkable, it could help pay for everyday expenses like:
- Funeral costs
- Rent or mortgage payments
- Vehicle expenses
- Clothing and toiletries
- Utility bills
What is Permanent Life Insurance?
Permanent life insurance also sometime referred to as Cash Value Life Insurance is a policy that lasts for the lifetime of the policyholder as long as the policyholder pays the applicable premium. A permanent policy also accumulates cash value and typically the policy may be "cashed out" or borrowed against if the policyholder needs access to the money. In general, the longer you own a permanent policy, the greater your total return will be. Like term life insurance, beneficiaries receive death benefits to help pay for the expenses that may come with the loss of an income.
Some policyholders who choose permanent life insurance are looking ahead to retirement. Others chose permanent life insurance for estate planning purposes. The benefits of permanent plans may help take care of things like:
- Funeral costs
- Mortgage payments
- House maintenance
- Retirement expenses
- Emergency funds for family members
The Major Differences: Time & Money
While both term life insurance and permanent life insurance provide beneficiaries with monetary compensation, there are two general differences between the two types of life insurance:
- Term life insurance lasts for a pre-defined period of time.
- Permanent life insurance exists for the life of the policyholder as long as the policy is kept current.
- Term life insurance premiums are typically lower but does not accumulate any cash value over the term.
- Permanent life insurance premiums are typically higher but the policy will earn cash over the lifetime of the policy.
Term Life Insurance or Permanent Life Insurance?
When thinking about purchasing life insurance, take a moment to think about your family's future financial goals. Do they include buying a home? Paying off your son's student loans? Ensuring that your spouse is taken care of in retirement? A life insurance policy could help your family achieve these goals. Take a look at the benefits below to help understand the type of life insurance policy that could better fit your needs.
Could term life insurance be right for you?
What are the benefits of buying a term life insurance plan? Term life insurance plans generally offer:
- Simple coverage for a defined period of time
- Consistent premiums
- Generally offers the largest insurance protection for your premium dollar.
- Often quick coverage (With Direct Auto Insurance, no medical examination is required. Just answer a few simple health questions.)
Many people choose term life insurance to help immediately care for their family financially should the unexpected occur. For example, a construction worker who has a wife and three children may choose term life insurance to help pay for his final expenses. A single mother may choose term life insurance to help continue to pay for her children's private school in case of a tragedy. Even if for a short season of life, these two families could benefit from the additional peace-of-mind, and potential financial support, of a term life insurance policy.
Could permanent life insurance be right for you?
What are the benefits of buying a permanent life insurance plan? These plans generally offer:
- Lifelong coverage (even if the policyholder's health fails)
- Cash savings components
- Tax-privileged savings
Some people choose permanent life insurance to help financially care for those they love in the long-term, and to ensure that their beneficiaries receive a payout regardless of when they die. They may have a spouse who is not able to work or a permanently disabled dependent residing with them, both of whom may gain peace-of-mind in knowing that they would be able to maintain their lifestyle if the policyholder was no longer around. Others choose permanent life insurance as part of their long-term estate planning strategy. However, keep in mind that rate of return on a cash value life insurance policy is not guaranteed to increase at the same level as interest rates or other forms of investment.
Term Life Insurance Through Direct Auto Insurance
Whether term or permanent, individuals often choose life insurance because it can help provide their loved one's with financial assistance in the event of an unexpected tragedy, a tragedy that could put their family in a difficult financial position.
Direct Auto Insurance offers individual 6-month and 12-month term life insurance policies at levels of $10,000, $15,000, and $25,000 that are guaranteed renewable at the same premium as your initial term.*
*Individual term life insurance by Direct General Life Insurance Company, Nashville, TN. Policy 58TL02010713. Policy levels, premium and other terms will vary by state, the insured's age, and the selected coverage. 12-month policies guaranteed renewable for 2 additional 12-month terms. 6-month policies guaranteed renewable for 5 additional 6-month terms.