Term vs. permanent life insurance: What is the difference?

Find out which type of life insurance policy may be optimal for you, your loved ones and your financial situation.

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Life insurance comes in many different forms which can fall into two categories: term life insurance and permanent life insurance. Both types can provide financial protection to your family, but they differ in terms of coverage, duration, features and benefits.

As you consider which policy may be right for you and your loved ones, your Ameriprise financial advisor can help you evaluate the pros and cons of term vs. permanent life insurance, as well as recommend options for a policy and carrier.

What is term life insurance? 

Term life insurance provides coverage at a fixed premium for a set time period. It can be a cost-effective way to secure financial protection for loved ones. With this type of policy:

  • You select the level premium duration, or term, of your policy — usually 10, 15, 20 or 30 years.
  • You select the death benefit amount.
  • The premiums you pay generally stay the same throughout the term. 
  • Your beneficiaries receive a payout (if premiums are paid as agreed), also known as a death benefit, from the policy only if you die during the term of the policy.
  • Once the level premium term period is up, you can continue with an annual renewable premium that will likely increase over time, or you can purchase a new one if your current age and health allow for a new policy. Some term policies allow you to convert some or all your coverage into a permanent policy within a specified period without additional medical underwriting.

What is permanent life insurance?

Permanent (or cash value) life insurance often requires higher initial premium levels than term life insurance, but it provides coverage until death and access to flexible features and benefits. With this type of policy:

  • Your coverage doesn’t expire if your premiums and the policy cash value growth are adequate to maintain the policy.
  • Your policy can grow cash value, tax deferred, in addition to offering a death benefit.
  • You can borrow cash from your life insurance policy tax free to meet other financial needs and goals. (Note: There are impacts this can have on the policy.)1

Learn more: Why life insurance? 6 ways it can help protect and achieve your financial goals

Advice spotlight

Consider securing a life insurance policy when you’re younger to potentially reap more benefits. Regardless of whether you choose permanent or term insurance, you are more likely to secure a lower monthly premium if you purchase a policy in your younger years. Additionally, obtaining a permanent life insurance policy at a young age gives your cash value more time to grow. 

What are the pros and cons of term vs. permanent life insurance?

Term life insurance 

Pros

Cons

You can choose the duration or

specific term of coverage.

Once your policy expires, so does the death benefit.

Typically offers lower monthly premiums than permanent.

No cash value.

If your policy includes a convertibility clause, you can convert your term policy to a permanent policy within a specified time period without additional medical underwriting.

Once the policy expires, if you want to renew coverage you will need to do one of the following:

  • Convert to an individual permanent policy without medical underwriting.* 
  • Continue to pay annual renewable premium rates, which increase each year, up to age 95.
  • Undergo underwriting for a new term policy which will likely have higher premiums.
 
*Subject to the provisions of the policy language. Typically, exercising a conversion should be initiated prior to the policy expiring.

 

Permanent life insurance

Pros

Cons

Lifetime financial protection.

Initial premiums can be more expensive than term.

Your policy has the potential to grow cash value, which accrues interest on a tax-deferred basis over time.

Policy can take 10+ years to build enough cash value to borrow from.

You can take withdrawals up to the amount of the premiums you paid into the policy and/or borrow from your cash value, income tax free, if you need it.

Accessing policy cash value through loans and surrenders may cause a permanent reduction in policy cash values and death benefit and negate any guarantees against lapse.1 

What are the types of permanent life insurance?

  1. Whole life policies are the most straightforward kind of permanent life insurance, offering fixed premiums and the ability of your policy's cash value to increase at a guaranteed rate that will not fluctuate with market changes. You can withdraw money or borrow against the cash value during your lifetime, though the insurer will reduce the death benefit by the same amount if you don’t pay the money back.
  2. Universal life policies typically offer more flexibility by allowing you to adjust your premiums and death benefits with a cash value that earns interest based on the current market or the policy’s minimum interest rate.
  3. Variable life policies have a guaranteed component like whole life, but in addition, allow you to put the cash value of your policy into investments you choose and earn tax-deferred returns based on their performance. Since the value of the investments can go down, variable life policies are riskier than whole or universal policies. However, variable policies provide minimum rate guarantees for the whole life portion of the policy so that the cash value has limited downside exposure to the market.  
  4. Variable universal life insurance policies combine features of universal and variable policies, allowing you to adjust your premiums and death benefit while putting the cash value in investments. Because the returns on your investments are not guaranteed, these policies involve more risk than whole or universal policies and may require additional premium amounts or a reduction of policy benefit if the value of your investments go down.

Advice spotlight

You can avoid selling investments during a down market by tapping into whole life insurance for income instead. Unlike other forms of permanent life insurance, a whole life policy is not dependent on market investment returns or a market interest rate. Withdrawing cash from your whole life insurance’s cash value1 is an alternative to consider if you normally rely on investments for income. There can be an impact to your policy and death benefit, so make sure you understand all the tradeoffs and risks before you employ this strategy.

How do I decide which is right for me?

When you’re considering term or permanent life insurance, ask yourself the following questions:

  • Would your spouse or partner lose a significant amount of income or support if you passed away?
  • How much of a financial burden would your family face if you died unexpectedly?
  • If you have children, how old are they? How long do you want them to be covered by the protection of a death benefit should you pass away?
  • Will you have lifelong dependents (e.g., a child with disabilities who will need extra care)?
  • Do you have any debt, like a mortgage, car loan or credit card debt?
  • How might your family’s needs change over time?
  • Do you want to leave a legacy to family or charity?
  • Are you or will you be concerned about estate taxes?

Find the right coverage for your family

Before purchasing a life insurance policy, connect with your Ameriprise financial advisor for guidance on choosing coverage and to better understand how term or permanent life insurance may align with your overall financial goals.

Is term or permanent life insurance a better fit for my unique financial situation? Should I buy term life insurance and invest the difference? In what scenarios could I use the cash value from a permanent life insurance policy?

When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.

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Find a life insurance policy that protects your loved ones and financial interests.

Or, request an appointment online to speak with an advisor. 

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At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's. 

If you know someone who could benefit from a conversation, please refer me.

Background and qualification information is available at FINRA's BrokerCheck website.

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1Accessing policy cash value through loans and surrenders may cause a permanent reduction of policy cash values and death benefit and negate any guarantees against lapse. The amount that can be borrowed or surrendered will be affected by the surrender charges applicable to the policy. Loans may be subject to interest charges. Although loans are generally not taxable, there may be tax consequences if the policy lapses or is surrendered with a loan (even as part of a 1035 exchange). It is possible that the amount of taxable income generated at the lapse or surrender of a policy with a loan may exceed the actual amount of cash received. Surrenders are generally taxable to the extent they exceed basis in the policy. If the policy is a modified endowment contract (MEC), pre-death distributions, including loans, from the policy are taxed on an income-first basis, and there may also be a 10% federal income tax penalty for distributions prior to age 59-1/2.
This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned.  The information is not intended to be used as the primary basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please consult with your financial advisor regarding your specific financial situation.
All guarantees are based on the continued claims-paying ability of the issuing company.
Before you purchase, be sure to ask your financial advisor about the life insurance policy’s features, benefits, risks and fees, and whether the life insurance is appropriate for you, based upon your financial situation and objectives.
The initial consultation provides an overview of financial planning concepts.  You will not receive written analysis and/or recommendations.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
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