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Term vs. permanent life insurance

Life insurance can help provide retirement and other benefits during your lifetime in addition to offering longer-term finanical protection for those you care about.

There are several types of life insurance policies to consider. Some policies offer protection for a specific term while others offer longer-term protection. While both types can provide financial protection to your family, they differ in terms of coverage, duration, features and benefits. To decide which type of policy may be right for you and your loved ones, it’s important to understand the key differences between term and permanent life insurance. 

In this article:

What is term life insurance? 

When searching for a life insurance policy, term life insurance typically offers the following features and benefits:

  • You select the 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 will receive a payout, also known as a death benefit, from the policy only if you die during the term of the policy.
  • Once the term is up, your policy expires, and you must renew it or purchase a new one. Keep in mind, if you renew or purchase a new policy, your premium rates may likely increase.
  • Term life insurance can be a cost-effective, albeit temporary way to provide financial protection for loved ones.
  • Some term policies allow you to convert some or all of your coverage into a permanent policy within a specified time period.

What is permanent life insurance?

Permanent (or cash value) life insurance provides coverage until death, as long as your premiums are paid on time. With this type of policy:

  • Your coverage doesn’t expire if you continue to pay premiums.
  • Your policy has the opportunity to 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 need and goals.
  • Offers flexible features and benefits including how cash value grows. 

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

Term life insurance 

Pros Cons
If your goal is shorter-term coverage, 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. 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
* Subject to the provisions of the policy language

Permanent life insurance:

Pros Cons
Life-time financial protection and premiums won’t increase. Monthly premiums can be more expensive than term.
Your policy grows 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 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. 

 

Various personal factors such as your age, pre-existing health conditions and daily habits (like smoking) are also taken into consideration when your monthly premium amount is set. This may be a pro or a con, depending on your situation.

Your financial advisor can help you better understand the benefits of term and permanent life insurance — and how they pertain to your personal situation.

When should I buy life insurance?

While there is no one-size-fits-all timeline for when to buy life insurance, several factors can help you determine when you may want to consider it. In many cases, the younger you are when you purchase life insurance, the more benefits you get out of your policy. Here are a couple of reasons why:

  • Generally, the younger you are when you purchase a life insurance policy, the more likely you are of securing a lower monthly premium.
  • If you choose to purchase permanent life insurance, starting earlier gives you more time for your cash value to grow. 

How do I decide which policy is right for me?

Life insurance can provide valuable financial security for your family once you are gone. When you’re considering life insurance, it may be helpful to ask yourself the following questions:

  • If you have children, how old are they now? How long 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 you/your family’s need change over time?
  • How much of a financial burden would your family face if you died unexpectedly?
  • Do you want to leave a legacy to family or charity?
  • Are you or will you be concerned about estate taxes?

Before purchasing any life insurance policy, it’s important to talk to an Ameriprise financial advisor so you can make a decision that is right for you.
 

An Ameriprise financial advisor can help you evaluate your life insurance needs and solutions.

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

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

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.
Is not a Deposit | Is not FDIC insured | Is not insured by any Federal Government Agency| Are not a Bank, Credit Union or Savings or Loan Guaranteed 
Accessing 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.
Ameriprise Financial Services, LLC. Member FINRA and SIPC. CA License #0684538