Term vs. permanent life insurance

When we talk about life insurance, many people envision the ultimate outcome: a payout to a beneficiary when someone passes away. And that is true, for term life insurance. Permanent life insurance takes it a step further. Not only does it include a death benefit, but it features a cash value or savings benefit, which can be used by the policyholder in a variety of ways.

What is term life insurance?

Term life insurance provides a death benefit, which is generally paid to the beneficiary free of federal income tax. The insurance pays the policy’s death benefit if the insured person dies while the policy is in force. The policyholder keeps the policy active by paying the premium in full each year.

What is permanent life insurance?

Permanent insurance, is intended to last a person’s lifetime. The premium is generally higher than term life insurance because it not only funds the tax-free death benefit, but a cash value account. In addition to the death benefit, the policy’s “cash value” grows over time and can be used for a number of purposes, including low-interest loans, while the policyholder is alive. Policyholders can use the cash value account to create an income stream for supplemental retirement income as well, though that may affect the death benefit.

What kind of life insurance is right for you?

Benefits of term life insurance

Term life insurance is generally more affordable than permanent life insurance, with some policies priced less than $20 per month for $500,000 of coverage for healthy people in their twenties. Unlike permanent life insurance, term life insurance provides coverage for a specific period, typically 10-30 years. For people who "buy term and invest the rest" this means they can have affordable policy with a defined end date while freeing up cash for other financial priorities. Many people align their term life insurance policy with a specific financial milestone, such as paying off a mortgage or a child becoming financially independent.

Benefits of permanent life insurance

Two advantages of permanent life insurance are that the premium amount generally remains level through the insured’s lifetime, and also the guaranteed-savings aspect.

The savings aspect of permanent life insurance is especially good for people who may not be as disciplined about saving money on their own, says Jason Hamilton, a California-based financial planner. Term insurance is intended to cover death-related financial losses, with the idea that the person saves money through other investments so they would have enough assets to pay for dependents’ living expenses, should the person die after the insurance policy ends. If someone isn’t motivated to save through other means, permanent life insurance is a way to build savings through the premiums.

Below are a few additional benefits of permanent life insurance:

• Tax-free death benefits The beneficiary of a permanent life policy receives a guaranteed death benefit when the policyholder passes away. In most cases, it's tax free.
• Build cash value A permanent life insurance policy can build “cash value” that policyholders can withdraw during their lifetime.
• Provide financial stability If your spouse or children depend on your income, permanent life insurance can provide financial support when you’re gone.
• Focus on the long term Permanent life insurance is intended to last a lifetime. The premium generally stays the same and you get peace of mind knowing that family is taken care of even if the breadwinner passes away.
• Safeguard your inheritance: Those wanting to leave their heirs an inheritance can use permanent life insurance to pass down money to the next generation.
• Insurance is guaranteed for life Once your policy is active, and if you pay your required premiums on time, the insurance policy will remain in force for your lifetime.
• Reap rewards Some permanent life insurance options pay the owner dividends, which can be taken as cash, applied to your premium, saved to gather interest or used to buy more insurance.
• Safe investment option: Many permanent life insurance policies offer a guaranteed interest rate on the “cash value” that builds up.
• Affordable premiums Buying permanent life insurance when you’re young offers affordable premiums that can stay with you throughout your lifetime.

Other life insurance considerations

Permanent life insurance policies usually have surrender charges. That means that if you cancel a policy during the early years of the policy, a portion of the cash value is forfeited as a penalty.

Dropping permanent insurance may mean that the person won’t have any life insurance coverage, which leaves family members at risk if the person dies. As someone ages they are less likely to qualify for term life insurance. The rates to start a new policy or continue after the term policy changes, are based partly on the person’s current age and health status. Someone may not qualify for life insurance if they’ve had certain medical conditions.

Choosing the right life insurance

Some people prefer to have both types of insurance. According to a LIMRA study, done by a life insurance research company, 18% of Americans who have life insurance have both permanent and term policies. They use them as an effective strategy for lifelong, affordable coverage.

Learn more about all of the different types of life insurance to discover which choice is right for you. Nationwide helps to make the decision and quote process hassle-free.

You want to ensure you choose a company with the financial strength and stability you're looking for. And when you’re deciding between purchasing term or permanent life insurance, talk with a financial professional or book an appointment with a Nationwide specialist to help you make an informed decision.