Term vs. Permanent Life: Four Issues to Consider

There are four issues when comparing Permanent and Term life insurance - premium, cash value, death benefit, and duration of coverage. Consider the impact on each of these issues in your decision about life insurance as we look at the different types of Permanent and Term life policies.

The most noticeable difference between Permanent and Term life is the premium being roughly four times higher for Permanent life. The most important impact is on cash value, death benefit, and duration of coverage. While Permanent life builds cash value which can be borrowed against and provides coverage for your entire life, Term life builds no cash value and is for a specific period of time.

With Permanent life, you can choose Whole, Universal or Variable. Whole life has the highest and most stable premiums and provides guaranteed cash value and death benefit. Universal life provides a lower, more variable premium than Whole life and while retaining most of the death benefit, the cash value earnings are based on an annually-determined credited interest rate which depends heavily on the performance of your invested premiums. There is no guarantee as to what that credited interest rate will be from year to year and, as a result, there is no guarantee on the cash value of the policy. With Variable life, both the death benefit and the premium are determined by the performance of your invested premiums and you have greater control over the investments. While Variable life has the greatest potential of cash value increase, there is no guaranteed cash value.

As with Permanent life, there are three choices among Term life - Level term, Annual renewable, and Decreasing term. Level term provides level death benefits and premiums for the determined duration of coverage. However, this is not necessarily a guaranteed level of coverage. This varies, so check the individual policy. Annual renewable policies offer the highest coverage for the lowest premium, though that premium will go up every time it is renewed until the policy is surrendered. Because of this increase, most advisors suggest that no Annual renewable policy should be used for more than three years. Decreasing term life is a policy with level premiums sometimes called Mortgage Protection Insurance because it provides the greatest amount of death benefit at the beginning of the policy, when one would owe the most on their mortgage. Decreasing term can protect a large purchase like a home and insure that your family has what you intended to pay off in your lifetime. However, the longer you live with a Decreasing term policy, the less the benefit when you die.

One of the best analogies for the choice between Permanent and Term life is the choice between buying and renting a home. You will probably pay less to rent, but will have no equity against which to borrow.

By considering the impact on premium, cash value, death benefit, and duration of coverage with each type of policy, you will be able to make the decision that best meets your current and future financial standing and provides your family with the peace of mind that their lives (and lifestyle) are protected beyond your own.