What's the Difference Between Term and Permanent Life Insurance?
Term life insurance provides coverage for a set period, often 10, 20, or 30 years. It generally costs less at the beginning than permanent life insurance with a similar coverage amount. It's commonly used to cover financial responsibilities that last for a limited time, such as a mortgage, debts, or replacing income during certain stages of life.
Permanent life insurance is designed to provide coverage for your entire life, as long as the policy conditions are met. It generally costs more at the beginning, but its features can support long-term financial goals, including estate planning and leaving an inheritance.
Some permanent life insurance policies also build cash value over time. How this works depends on the product.
It's also possible to have both term and permanent life insurance at the same time.
What Is T10 or T20 Term Life Insurance?
T10 and T20 generally refer to the initial period during which your premiums are guaranteed. A T10 policy typically offers fixed premiums for 10 years, while a T20 policy offers fixed premiums for 20 years.
Your coverage doesn't necessarily end when that period is over. Many policies allow you to renew without providing new medical evidence, but premiums generally increase when you renew.
Some policies also let you convert your term life insurance into permanent coverage, depending on the policy conditions and age limits.
Term life insurance usually doesn't build cash value, which helps explain why its initial cost is generally lower.
The main differences between T10 and T20 are how long your premiums remain stable, the renewal conditions, and the cost of coverage.
What Is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance designed to remain active throughout your lifetime, as long as the policy conditions are met.
Premiums are generally fixed and guaranteed. Depending on the product, you may pay them throughout your life or for a specific period.
Many whole life policies build cash value over time. Depending on the policy, you may be able to access this money by taking out a loan against the policy or cancelling your coverage.
However, accessing the cash value may reduce the death benefit, lead to fees or interest charges, and, in some situations, have tax consequences.
Some policies also pay dividends, although these amounts are generally not guaranteed.
Because whole life insurance provides lifelong protection and additional features, it generally costs more at the beginning than term life insurance with a similar coverage amount.
What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that combines insurance coverage with a savings or investment component.
The money you pay into the policy helps cover the cost of insurance and policy fees. Depending on the product, part of your payments may also be directed toward investment options.
Some policies offer flexibility in how much you pay, your coverage amount, and the investment options available, within the policy's limits.
The value accumulated in your policy depends on several factors, including your payments, fees, insurance costs, and investment returns. These returns aren't necessarily guaranteed.
If the accumulated funds aren't enough to cover the policy's costs, you may need to make additional payments to keep your coverage active.
Universal life insurance can therefore involve more complex financial features and risks than term life insurance.
When Is Term or Permanent Life Insurance Typically Used?
Term life insurance is commonly used to cover financial responsibilities that decrease or eventually end, such as a mortgage, certain debts, or the financial needs of dependent children.
Permanent life insurance provides long-term protection and may be used for estate planning, leaving an inheritance, or making funds available after death.
For a similar coverage amount, term life insurance generally costs less at the beginning. Permanent life insurance typically has a higher initial cost but may offer additional features, depending on the policy.
The main differences between these types of insurance are the length of coverage, premiums, benefits, and whether the policy can build cash value.
Your financial responsibilities and insurance needs may also change over time, depending on your family situation, debts, income, and assets.
Can You Convert Term Life Insurance Into Permanent Coverage Later?
Some term life insurance policies include a conversion option that allows you to switch part or all of your coverage to permanent life insurance.
This can generally be done without providing new medical evidence, as long as you meet the policy conditions.
However, converting your policy doesn't mean your premiums will stay the same. The cost of your new coverage depends on factors such as your age at the time of conversion, the product you choose, and the applicable conditions.
Age limits, deadlines, eligible coverage amounts, and available permanent insurance products vary between insurers.
Not all term life insurance policies offer this option.
In Summary
Term and permanent life insurance provide different types of protection, with differences in coverage length, premiums, and features.
Term life insurance generally offers an initial period of guaranteed premiums, while permanent life insurance is designed to provide coverage throughout your lifetime.
Whole life and universal life insurance also have different features when it comes to costs, accumulated value, and benefits.
Coverage, renewal and conversion options, and applicable conditions all depend on the policy.
