Why Will I Choose Permanent Life Insurance Over Term Life Insurance?

Choosing the right life insurance plan seems daunting while navigating different insurance policies. Like everyone has different needs and objectives, life insurance policies are not all the same. A size-fits-all approach doesn't work when it comes to financial planning.

Most people consider term life insurance a better option than permanent insurance due to the expensive rates and financial obligations. However, if you need lifelong coverage and want to make sure your loved ones are financially protected after your death, permanent life insurance would work best for you.

Both types of policies are suitable and have their benefits, so how would you know which one to buy? To help you get through this complex discussion, we've put together this guide that explains both permanent and term life insurance in detail so you can choose the right policy for you and your family.

Difference Between Term and Permanent Life Insurance

Term and permanent life insurance policies are two main types. While term life insurance is simple and cheap, permanent life insurance is the most well-known policy that tends to be more expensive than term life insurance but also provides some additional benefits. If you are unsure which type of insurance you should get, you'll need to understand the differences between both to select the best that suits your needs.

Term Life Insurance

It is a type of policy that provides coverage for a fixed period with a definitive end to cover a specific financial concern, such as the years until you retire or the years of a mortgage. It substitutes 10, 20, or 30 years and has a cash value component that policyholders can receive at the end of the term.

The premiums are lower and stay the same throughout the world. The insurance company calculates the premiums based on the individual's age, health, and life expectancy. If you die within the policy's time frame, the insurance company will pay your beneficiaries the death benefit, and there will be no need to pay for further life insurance.

However, if you live past the term, your coverage ends, and no one will get any money.

Permanent Life Insurance

It can be defined as more of an exclusive policy that provides lifelong coverage and offers death benefits as long as premiums are paid. The death benefit is the amount of money delivered to your designated beneficiary after your death, whether you passed away immediately after purchasing the insurance or 50 years later.

The policy has a cash value component that grows over time as you make regular payments. It lets you take out a loan from the insurer against your policy's cash value, which differs from the death benefit. If you cancel your life insurance policy, you will get the accumulated cash value but could be assessed a surrender charge for early cancellation.

This policy is much more expensive than the term, but the premium won't fluctuate during the policy's life.

Term vs. Permanent Life Insurance

To choose a policy, first, you need to determine how much coverage you need and for how long you need it. Term life insurance is far cheaper than permanent insurance, making it a good choice if you don't have enough funds to spare.

However, if you outlive the policy, your coverage will end, and you won't receive any benefit. Term policies allow you to add a return-of-premium rider to receive the premiums paid if you don't die during the term, but such a rider will also increase the policy's price.

On the other hand, permanent life insurance is a better option if you have some essential financial obligations that are not time-sensitive. For example, if you own enough assets that your family would have to pay estate taxes after you pass away, you should purchase a permanent one to help your family pay the taxes without any problem.

Let's review the pros and cons of both types of insurance so you can choose the best plan for yourself and your family:

Permanent Life Insurance

Pros

1. The cash value for a permanent life insurance policy grows tax-deferred, just like gains in a retirement account.
2. You'll receive some of the cash value when you surrender your coverage.
3. No income taxes are implemented after you withdraw the policy as long as the sum you receive is more significant than what you have paid in premiums.

Cons

1. You can only build cash value if you pay the due premiums.
2. You must pay premiums for an extended period, even if you face income changes.

Term Life Insurance

Pros

1. It is one of the easiest to understand and least expensive types of life insurance available.
2. The premiums are lower and fixed throughout the policy.
3. If you purchase term life insurance at a young age, your monthly premiums will stay low until the end of the policy.

Cons

1. It only gives coverage for a specific amount of time.
2. It is tough to get new coverage after the expiration of the level term period.
3. Your premium will increase drastically after the level period ends.

Conclusion

To conclude this section, you should choose Permanent life insurance over term life insurance as it offers more benefits and typically has a significant cash value and saving element, which you can't find in term life insurance. It stretches indefinitely and has long-term financial planning goals that cover you until you die.

Each time you pay a premium, a portion of the money goes into a cash-value account within life insurance that can be tapped into later in life.
Once the cash value reaches a specific size, you can loan it from the insurance company and use it as collateral.

Moreover, permanent life insurance doesn't require any qualifications or credit checks to lend the money because the insurer holds the money to cover the loan if it's not paid back in time.