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The Difference between Perm and Term Life Insurance

The Difference between Perm and Term Life Insurance

Have you ever wondered what the difference is between permanent and term life insurance? We know there has to be a difference. After all, they're two distinct types of policies, so one must be different from the other. Right?

Frazer Pugh
Last updated: Jan 20, 2022 | Jan 19, 2022

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Have you ever wondered what the difference is between permanent and term life insurance? We know there has to be a difference. After all, they're two distinct types of policies, so one must be different from the other. Right?

Not necessarily. In fact, that's not always the case. Due to market changes over time, some term policies have been converted into permanent policies at the option of the policyholders. In fact, when you look into it, there are a number of similarities between term and permanent life insurance.

In terms of coverage, both provide a death benefit in exchange for premiums being paid to the insurer. Both plans can be purchased with cash value components that can be borrowed against or surrendered for cash. And both types of policies (but especially permanent) often require the policyholder to pass a medical examination when applying for coverage.

But still, there are some distinct differences between these two types of life insurance policies.

The Length of Coverage

The first and most evident difference between permanent and set term policies is the length of their coverage. A permanent insurance policy will provide lifetime coverage, which means life-long protection as long as the policy is in force.

Term life insurance only provides limited protection depending on what coverage you choose. Commonly, a term life insurance can be as short as one year to as long as 30 years. This type of policy is also tailored for flexibility to fit everyone's financial capability.

Suppose you are looking after your family and are worried about the financial dilemma when something terrible happens to you. In that case, you might want to consider purchasing a permanent life insurance policy.

The Cost

Because a perm life insurance policy offers lifetime insurance, it typically costs more than a term insurance policy. If you plan to get permanent life insurance, you have to be financially capable and ready to invest in this kind of investment.

If you are starting with your financial journey, opting for a term policy is the best option. However, you have to know that term insurance policies increase their price package every renewal. Therefore, it would be best to acquire a permanent policy when your finances let you do so.

More well-established professionals choose to acquire a permanent life insurance policy to save more money in the long run.

Benefits of the Policies

Another difference between these two policies is the benefits it provides. A permanent life insurance policy includes a death benefit and cash value. The death benefit is money given to your beneficiaries when you pass away.

A cash value is separate cash that acts as savings that you can access while still alive. The benefit coverage of a perm policy will start from the moment you purchase your insurance until the day you die.

On the other hand, term insurance policies also offer death benefits if the coverage owner passes away during the specified term of the insurance. It will also be given to your beneficiaries.

There are no additional benefits included in a term insurance policy other than the death benefit. It does not include savings features like the perm policy, and this type of coverage often depends on the person's age, life expectancy, and health.

Easy Conversion of Policy

A term policy can be easily converted into perm coverage without any inconvenience. All you have to do is pay the premium of a permanent insurance policy, and your coverage will be upgraded.

When it comes to a permanent policy, policyholders can convert their life insurance coverage into cash before claiming a death benefit. Sometimes, the cash you can acquire in exchange for surrendering your policy can be four times greater than the purchase value of your policy.

The reason behind this is that the value of your policy accrued over time. This conversion is what we referred to as earlier as the cash value that is equivalent to cash savings. If you want to acquire the cash value of your purchased policy, let your insurance company know, and they will be happy to assist you along the process.

Types of Permanent Insurance Policy

Suppose you want to acquire a permanent life insurance policy you might want to check out. It will help you decide what permanent policy will work for you and your family.

  • Whole Life Coverage - Provides a fixed premium throughout the efficacy of the policy. Depending on your insurance company, this policy's cash value is set to grow over time.
  • Universal Life Coverage - This is more flexible than the whole life coverage. Universal life coverage best fits individuals with more sophisticated financial needs. The flexibility includes the chance to adjust the amount of your policy premium and your death benefit.
  • Variable Insurance Policy - Offers a wider range of investment choices to the policy owner.

Types of Term Insurance Policy

You will also be given an option for the term policies before you can acquire one. Again, each option has its respective differences that you should also understand. Here is the policy option that your insurance company will be offering you.

  • Level Term Life Policy - With this policy, expect that its premium will stay the same the whole time. You can also have the opportunity to choose a term that will work for you according to your financial situation.
  • Annually Renewable Policy - This is the term policy that the premium increases every renewal. It is the most affordable type of insurance policy. But don't be fooled. This will not be the case as time passes.

Choose Which One Suits You Best

Both types of policies can provide you with an advantage depending on your needs. Therefore, it is best to choose which one you will purchase according to your needs and capabilities in paying the insurance.

Frazer Pugh | I work in the investment management sector as a professional. Previously, I advised top financial services companies on balance sheet management, portfolio planning, and valuations as a consultant. I am currently pursuing a part-time MBA at Melbourne University, where I am a lecturer in accounting and hedge fund strategies, as well as a mentor/coach in a part-time equity analysis initiative. I have a bachelor's degree in economics, a master's degree in finance, and am a Chartered Accountant. I enjoy instructing and assisting others in achieving their objectives.

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