Term vs. Permanent Life Insurance – What is the Difference?

It’s important your life insurance plan is specific to you and your family’s needs. As you look into the different types you might find yourself asking a lot of questions such as, what is Term Life Insurance?  What is Permanent Life Insurance?  What is the difference and which is better for me?  Great questions and the answer is, “It depends.” 

Term Life Insurance  

Term Life Insurance is a contract with an insurance company that will pay your beneficiaries a tax free death benefit should you happen to pass away early.  Term life insurance is temporary – it is not designed to last forever, often coming in 10, 15, 20 and 30 year contracts.  It is designed to replace the income to those who are dependent upon you continuing to earn it. The benefits of term insurance include that it’s generally the most affordable, especially when you are young and you have limited disposable income. Because of its low cost, you can affordably get a relatively large amount of coverage to cover your obligations.

Permanent Life Insurance 

Permanent Life Insurance is a contract with an insurance company that will also pay your beneficiaries a tax free death benefit no matter when you pass away.  It has a cash value that accumulates over time giving the owner of the policy some options/flexibility later in life.  Should the owner decide they no longer want the coverage in place they can utilize that cash value in a number of ways including regular, income tax free payments.  It is best for those having a need for life insurance who also have the financial means, income and desire to save. 

 Within Permanent Insurance there are two main types:   

  1. Whole Life 
  2. Universal Life  

Most people have heard of these life policies but few understand the differences. 

 Whole Life Insurance 

Whole Life is a kind of permanent life insurance that offers several guaranteed elements which appeal to many people. The premiums are guaranteed not to increase. Part of those premiums build cash value with a guaranteed interest rate. The death benefits of the policy are guaranteed to never decrease. You have to pay your premiums on time, but you get to choose the payment time frame up front such as 1 year, 15 years, to age 65, or to age 100.

Universal Life Insurance  

Universal Life is permanent life insurance that has projected cash value and death benefit.  The projections are estimates of what the policy might look like in future years but the actual results over time can and will vary.  This could be for the better or worse of the policy.  Under certain circumstances the projections when started could have been too optimistic and this could cause the policy to lapse prior to the death of the insured.  Other times the policy could perform better than projected which would either result in higher cash values and death benefits or the ability of the owner to discontinue premium payments while still keeping the policy in force. Some Universal Life policies offer a unique way of growing the cash value that credits interest as a stock market index, like the S&P 500, goes up. But when the index drops, your cash value is protected and will not decrease.

As life changes, your life insurance needs can change over time. To determine which type of policy is right for you, it is important to work with an agent who understands how each policy works and understands your goals and financial situation. 

*Life insurance and annuity products offered through Farm Bureau Life Insurance Company. See your Rural Mutual agent for more info about these products.