The Differences Between Term and Permanent Life Insurance
Most people purchase life insurance because of love. They have loved ones that could be affected by their death.
Life insurance can be a huge financial relief for those that lose a loved one and need to pay not only the funeral costs, but all of the other day-to-day bills like the mortgage, the credit cards, or the car payment. Or, you may even be thinking ahead about your children’s college tuition, which can also be paid for with life insurance.
If you’ve been thinking about purchasing a life insurance policy, you’ve probably noticed that there are two main kinds of life insurance: term and permanent.
Term Life Insurance
Affordability
The biggest advantage of term life insurance is how affordable it is.
There is less risk for an insurer because the term coverage is temporary. And the younger and healthier you are, the better rate you’ll receive.
Term life insurance rates are fixed when you buy the policy. You don’t need to worry about the insurer raising prices because of age or a health issue.
Customizable
With term insurance, you choose how much coverage to buy and how long you want the policy to last.
Your coverage can last 10-40 years. However, your age can limit term length options. For example, a 60-year-old will not qualify for a 40-year term policy.
A longer term will mean a higher premium. A higher face amount (a.k.a. coverage amount) will also mean a higher premium. However, it’s easy to customize a policy in order to fit into most budgets.
Protection Ends
When your term ends, your coverage ends. Policies often have terms available for 10 – 40 years.
Term insurance is designed to protect your dependents in the event you die prematurely. If you die within the term, your beneficiaries receive the death benefit. If you don’t die, there is no payout.
Term life insurance is great for those that want to financially protect their loved ones for a certain period of time when you feel your family would experience the most financial devastation if you were to die. The payout replaces your income and can help your family pay for expenses that you currently take care of and even future expenses such as college tuition.
Ideally, your need for term life insurance would end when the term expires. Once your children are grown and on their own and you’re nearing retirement, you no longer need term insurance protection.
What happens at the end of the term?
Term life insurance is not permanent. The coverage ends when the term you chose is complete. However, if you decide you still want coverage, you may have some options.
Many term policies come with conversion and renewability options. Converting means you change your term policy into a permanent policy. Renewing means you continue your same term coverage for another year.
Your price will increase if you continue coverage.
If you decide to renew your policy at the end of your term, your premiums will be much higher. But the insurance company won’t require you to prove you’re still healthy, so this option is ideal if you find yourself terminally ill.
Instead of renewing the same term coverage another year, you may decide to go with a term conversion instead. A term conversion is when all or some of your term life insurance policy is converted into a permanent life insurance policy.
Most term policies allow you to convert to a permanent policy regardless of your health as long as you do so before the deadline on your current policy. Like renewability rates however, your conversion rates will be much higher than your initial term rates because you’re changing the type of policy you own. Instead of a temporary term policy, you’re converting to a permanent policy that will last the remainder of your life.
For those who perhaps would benefit from permanent life insurance but cannot currently afford the premiums, guaranteed conversion can offer protection along with the ability to secure needed coverage down the road, even if you become physically impaired or otherwise difficult to insure.
