Term Versus Permanent Life Insurance

When shopping for life insurance, be sure that you purchase a policy that is appropriate for your needs. There are two broad categories of life insurance with different characteristics: term life insurance and permanent life insurance (also called whole life insurance). Which choice is best for you will depend on your age, financial position and reasons for purchasing life insurance, among other things. Here are some of the ways that term life insurance and permanent life insurance differ.

Term Life Insurance

A term life insurance policy is straightforward life insurance. It pays the face amount of the policy to the beneficiary or beneficiaries if the insured dies. Because term life insurance is basic coverage, it generally costs less than permanent life insurance. It also usually covers death benefits over a certain term, or period of time.

Permanent Life Insurance

Permanent or whole life insurance combines term coverage with an investment vehicle. Therefore, a permanent life insurance policy builds cash value over time, and the owner of the policy can borrow against it. There are a number of different types of permanent or whole life policies, including traditional whole life, variable whole life and universal insurance. A permanent life insurance policy generally is more expensive than a term policy because you are paying for the investment component of the policy, as well as the life insurance coverage.

Deciding Whether to Buy Term Life Insurance or Permanent Life Insurance

Whether you should buy term insurance or permanent life insurance is something to discuss with a trusted financial advisor. Permanent or whole life insurance policies, in particular, can be complicated and difficult to compare, so the advice of a professional (ideally not the individual selling you the policy) can be invaluable. Having said that, here are a few factors to take into account when purchasing life insurance.

First, how long do you expect to keep the policy? If you plan to have it for a relatively short period of time, you probably will be better off with a term policy.

Second, how important it is to you to get the maximum amount of insurance coverage for the premium? If you want the biggest coverage bang for your buck, term life insurance probably will be your best bet.

Third, do you prefer a relatively simple policy that is easy to understand? If so, go for term life insurance. Because these policies generally have far fewer variables than permanent life insurance, they usually are relatively straightforward and easy to compare on price.

Fourth, are you using life insurance as part of your savings or estate planning? If so, you may have more flexibility to accomplish your goals with permanent life insurance.

Sources:

"Term or whole Life?" SmartMoney.com

"Should I buy term life insurance or cash value insurance?" Fool.com Insurance Center.