While term life insurance is initially less expensive, permanent life insurance may be more efficient in the long run. That’s because permanent life insurance never needs to be renewed, and your rates will not be adjusted as you get older.
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Term vs. Permanent Life Insurance
The term versus permanent life insurance debate has been going on for years. Since both can be effective ways to help protect your loved ones, this article explains the differences between the two types of coverage, so you can make an educated decision about which works best for you.
What’s the difference between term and permanent life?
Like all life insurance policies, term insurance and permanent insurance were created to protect the financial well-being of your loved ones in case you pass away. What makes them different, however, comes down to a few basic factors: how long the coverage lasts, the features and benefits they offer, and how the premiums (your payments) are structured. Let’s take a look at how they compare.
How long does the protection last?
Permanent life insurance: As the name suggests, permanent life policies (such as whole life) are designed to provide long-term—often lifelong—coverage. As long as you continue to pay your premiums, your coverage will be there for you whenever you need it.
Term life insurance: Conversely, term life policies provide temporary protection that lasts for a set period of time (the term). In many cases, the coverage can be renewed, but only up to a specific age, and your premiums will generally go up with each renewal.
What benefits do I get?
Permanent life insurance benefits:
These policies generally offer long-term death benefit protection and a host of potentially valuable features. In particular, most permanent life policies give you the opportunity to build cash value. This feature can be especially helpful later in life since the cash value you accumulate can be accessed to help pay for unexpected emergencies or milestone events like college and retirement.1
Term life insurance benefits:
With term coverage, you get short-term death benefit protection (often 10, 15, or 20 years), and your beneficiaries will receive a lump-sum death benefit if you pass away during this time. While term life does not offer any cash value accumulation, some policies come with flexible features that allow you to use your benefits early if you become terminally ill2 or will help pay your premiums if you become disabled.3
How much does the coverage cost?
Permanent life insurance costs:
Since each type of permanent life insurance uses a different payment method, let’s focus on the most common, whole life. With whole life coverage, your premiums are locked in at the time of purchase and are guaranteed not to go up. As a result, whole life coverage may start out more expensive than term, but in the long run it may prove to be a better value.
Term life insurance costs:
With term coverage, your premiums are locked in for the period of coverage you select. If you choose to renew your coverage, the premiums will increase annually. That’s why it’s important to carefully consider your time frame and select the length of coverage that fits your needs and budget.
How do I know which coverage is right for me?
Choosing one type of coverage over another can be difficult—especially if this is your first time purchasing life insurance. Since everyone has a unique set of needs, we recommend working with a New York Life agent. That way, you can go over all the information together and make sure you come up with an educated decision. In the meantime, the following guide may prove helpful:
Consider permanent life insurance if you:
- Need long-term financial protection.
- Would like to create an inheritance for your heirs.
- Could use a tax-advantaged way to save for future expenses.4
- Prefer stable premiums (available with whole life)
Consider term life insurance if you:
- Need short-term coverage or additional protection during specific times.
- Are just starting out or are on a budget.
- Want some flexibility in case your needs or circumstances change.
- Have other financial assets to leave behind as an inheritance.
Term vs. permanent life insurance FAQs
When the period of coverage you select expires, your coverage will come to an end, or you may be able to renew your coverage on a year-by-year basis.
Given the important role life insurance plays in protecting your loved ones, it’s advisable to secure coverage as soon as possible. Also, keep in mind that life insurance premiums are usually less expensive the younger you are when you buy it, so any delay may cost you.
While everyone’s financial needs are different, a good rule of thumb is to get a life insurance policy that will pay at least 10 times your annual salary. If you are a stay-at-home parent, you could calculate the annual cost of childcare, housekeeping, and any other services that your loved ones would have to pay for if you were gone and multiply that amount by the number of years needed. For a more personal—and accurate—assessment, feel free to reach out to your New York Life agent.
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1Accessing the cash value will reduce the available cash surrender value and death benefit.
2The Living Benefits Rider is an included feature on all term policies, but there is a cost to exercise this rider.
3The Disability Waiver of Premium feature can be added for an additional cost.
4The cash value component of a whole life policy grows tax deferred. Which means while the cash value grows you do not pay income taxes on it, allowing it to grow even faster. The cash value is yours to use during your lifetime and you can access it usually income tax free.