Life Insurance Basics
There are two basic types of life insurance: term life insurance and permanent life insurance. Term life lasts for a limited period of time, while permanent life lasts an entire life as long as the policyholder pays the premiums. Read on to learn the differences between these two types of life insurance to decide what’s right for your client.
Term vs. permanent life insurance: Quick comparison
Both term and permanent life insurance pay out a tax-free death benefit if the policyholder dies while their policy is in force, which can be used to pay off outstanding debt or cover a variety of expenses when they're gone. Because of its affordability, term life insurance is the best choice for most people. But permanent life insurance makes more sense if your client has complex finances or requires lifelong coverage.
|
Features |
Term life insurance |
Permanent life insurance |
|---|---|---|
|
Duration |
Up to 40 years |
Life |
|
Cost |
$20 to $30/month |
Varies by policy type, 5 to 15 times term life rates |
|
Guaranteed death benefit |
Yes |
Yes |
|
Guaranteed cash value |
No |
Yes |
|
Premiums |
Level |
Varies by policy |
|
Risks |
Can expire before you die |
High-cost premiums are difficult to maintain and cash value has low rate of return |
Methodology: Average term life insurance cost calculated based on rates for non-smoking males and females between 20 and 40 years old in a Preferred rate class, obtaining a 20-year, $500,000 term life insurance policy. Life insurance averages are based on a composite of policies offered by 10 carriers that offer policies through the Policygenius marketplace. Individual rates will vary as specific circumstances will affect each customer’s rate. Rate illustration valid as of 2/1/2022.
What is term life insurance?
Term life insurance policies last up to 40 years and are typically the most affordable life insurance option. Based on Policygenius data from February 2022, a 35-year-old male non-smoker could buy a 20-year, $500,000 policy for approximately $30 per month. Policyholders can add riders to customize their coverage, but the standard term life insurance policy doesn’t come with any additional features.
Most term life policies are level term life insurance, meaning the premiums and death benefit remain the same for the life of the policy.
Questions or want to learn more?
What is permanent life insurance?
Permanent life insurance never expires and comes with a savings-like component called the cash value. Because of the lifetime coverage and cash value, permanent policies are significantly more expensive than term policies. The high premiums are generally difficult to maintain over several decades, and many policies lapse due to nonpayment.
Whole life insurance is the most common type of permanent insurance and is five to 15 times more expensive than term life. Whole, variable, and universal life insurance each grow the cash value in different ways. The policy that's best for your client will depend on their risk tolerance, as well as how they plan to pay their policy’s premiums. Final expense insurance is best for older or less healthy people who might not qualify for a traditional policy
Term vs. permanent life insurance: Cost comparison
The table below compares sample monthly premiums for a 20-year term policy, a whole life policy, and two final expense policies for a 55-year old male. Premiums for universal, variable, and variable universal life policies depend on the policy terms, as well as fluctuations in the cash value.
|
Policy |
Death benefit |
Monthly premium |
|---|---|---|
|
Term life |
$250,000 |
$82.80 |
|
Whole life |
$250,000 |
$692.00 |
|
Guaranteed issue |
$25,000 |
$168.49 |
|
Simplified issue |
$25,000 |
$85.06 |
Methodology: Sample premiums are for a 55-year-old male non-smoker with a Preferred health rating, buying a 20-year, $250,000 term life insurance policy, a $250,000 whole life insurance policy from MassMutual paid up at 100 years old, a $25,000 guaranteed issue life insurance policy from AIG, and a $25,000 simplified issue life insurance policy from Mutual of Omaha. Term life insurance average is based on a composite of policies offered by Policygenius from AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI, and Transamerica and may vary by insurer, term, coverage amount, health class, and state. Not all policies are available in all states. Rate illustration valid as of 9/8/2022.
Should your client get term or permanent life insurance?
The type of life insurance coverage your client ultimately purchases depends on their financial plans. Most insurance shoppers will likely find a term life policy fits their needs, but there are some situations when a permanent policy is a better choice.
Your client should buy term insurance if they:
-
Want the most affordable life insurance
-
Will retire with enough savings to self-insure
-
Don’t plan to financially support adult children
-
Have outstanding debts or a mortgage
Your client should buy term insurance if they:
-
Have lifelong dependents, like children with disabilities
-
Plan to use the death benefit to pay estate taxes
-
Are investing in life insurance for retirement
-
Need funds for funeral expenses
-
Aren’t eligible for traditional coverage
How to convert from term to permanent life insurance
If your client will still have financial obligations when their term policy expires, they can convert it into a permanent policy with a term conversion rider. If they do so, they'll need to activate the rider before their policy expires in order to avoid any coverage gaps.
The choice between term and permanent insurance depends largely on your client's long-term financial needs. If they plan to self-insure once their debts are paid off, term life insurance will give them affordable coverage for only as long as they need it. Permanent life insurance is best for those with complicated financial assets or financial dependents.