They both are important, but their use and application are different in many ways.
Learn more about the different types of life insurance below and make sure to use our free comparison tool above! Just enter your zip code and start comparing rates today!
Term Life Insurance
Term life insurance is a temporary form of life insurance because it is issued for a set length of time of coverage, and then it expires.
For example, a term life insurance policy could be issued for a 5, 10, 15, 20, or 30 year period, and then it expires, and the coverage is ended.
Term life coverage is purchased because a lot of coverage, or death benefit, can be purchased for a small sum of money.
For a young family with children, who needs lots of protection, a term life policy can cover their needs more economically.
Term life insurance can be programmed to fit the period when the most death benefit is needed.
For example, a 30-year term plan can fit the period when there are children in the home through the time that they are in college, and then the term coverage expires.
Term coverage can be annually renewable term, level term, step term, or decreasing term. Each type of plan can fit different situations.
Annually renewable term will be the least expensive initially while a 30-year term will cost the most. The policies are priced according to the exposure and time that the insurance company has an exposed risk.
Permanent Life Insurance
Permanent life insurance is just what it says. It will provide coverage for the rest of a person’s life, or to the actuarial maximum age of 100.
Since the death benefit does not expire, like term life coverage does, there is no worry about ever losing life insurance coverage.
With term life coverage the price of the policy is either going to increase in price as the insured gets older, or the coverage will expire.
With permanent life coverage, the price remains the same as when the policy is started all the way through the life of the policy.
The reason this is so is that there is a reserve within the policy that grows and offsets the increasing mortality cost, allowing a level premium.
The most common type of permanent policy is called “whole life” because it exists for the “whole of life” until the actuarial age of 100 or until we die.
Just about every other type of permanent policy is a derivative from this concept.
Whole life has a cash value which is essentially the reserve that was mentioned.
The cash value makes up a portion of the death benefit, so the part of the policy that is not cash value decreases over time.
Some companies that sell both term and whole life also pay dividends which accumulate within the policy. The dividends are overcharges, to offset any unexpected quirks in a mortality assumption.
Both cash values and dividends accumulate on a tax-deferred basis until a policy is surrendered.
All life insurance, term and permanent, pay death benefits that are free of any income tax to the beneficiary.
Converting Term Life Insurance To Permanent Life Insurance
Term life insurance can be converted to a permanent life policy if the original term policy allows the conversion in its contract language.
In other words, the original term purchased must be a convertible term policy. A term policy can be sold as a “non-convertible” term plan, and it is a little cheaper in price.
However, for the modest extra charge it is worth it to purchase a convertible term policy.
The term conversion takes place regardless of the state of health of the insured.
The standard rate of the policy is guaranteed, which means that a person with any life ending disease will be able to extend their life insurance coverage until the day they die or to age 100 if they so desire.
The premium that would be paid for the converted policy will be the standard premium that would be paid for the permanent policy at the attained age when the policy is converted.
In other words, say an individual purchases a term policy at age 35, and at age 45 decides to convert the term policy to a whole life plan that the same company offers.
The premium for the whole life policy at age 45 would be charged to the insured when the conversion is made.
Types of Permanent Policies Available for Conversion
- Whole Life – This is the most common type of permanent coverage. It has a level premium, cash value and is engineered to last until age 100, sometimes longer for actuarial purposes.
- Whole Life Paid Up at Age 65 – This is essentially the same as whole life, but the plan is designed to have all payments cease when the insured reaches age 65.
- Twenty-Pay Life – This is whole life as well, only the payments are designed to last for twenty years, and then the policy is paid-up.
- Graded Premium Whole Life – The premiums start out lower, and then graduate to slightly above normal in three to five years. This enables people on a budget to get an easier start on the policy.
- Universal Life – Universal life is a type of whole life product that is built on changing current interest rates. It has a minimum rate as a floor and no ceiling. The cash values are derived by current rates of interest based upon an index. The premiums and death benefit can be raised or lowered by the insured within limits allowed by the policy.
- Guaranteed Universal Life (GUL) – This is a universal life policy that has specific guarantees as far as the certainty of cash values at certain points in the policy, such as age 65 and years before that.
- Indexed Universal Life – A form of whole life where the cash values and death benefits are tied to an index such as the S&P. Cash values rise as coordinated with a rise in the S&P, but remain level if the market falls.
The option of being able to convert a term policy to a whole life or another permanent type of policy is a great benefit for people who want to continue their coverage after their term policy runs out.
There are several different types of whole life type policies to have available for conversion, and it is a good idea to spend time with a life insurance agent or broker and make the decision that applies.
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