Last Updated: 08/18/2017
One of the most common questions our potential clients ask us is, “What’s the difference between term and permanent life insurance?”
Our agency works with over 60 top-rated life insurance companies to make sure we always match our clients with the best coverage options for their needs.
In this article, we’ll explain the differences between term and permanent life insurance to help you determine which type of coverage is the right fit for your needs. We’ve also provided some insider’s tips to help you save money on your life insurance policy.
Quick Article Guide
- What’s the Difference Between Term and Permanent Life Insurance?
- What Is Whole Life Insurance and Who Should Purchase It?
- What Is Guaranteed Universal Life Insurance?
- Who Should Purchase Term Life Insurance?
- How We Can Help You Save Money and Determine the Best Coverage for Your Needs
There are two basic types of life insurance policies: term life insurance and permanent life insurance. We’ll start by explaining term life insurance, which is the most straightforward and least expensive coverage available.
Term Life Insurance
Term life insurance provides guaranteed rates and coverage for a specific amount of time, or “term.” These policies usually offer $50,000 to $50,000,000 of coverage and they are sold in 5-year increments. The most common terms available are 10, 15, 20, 25, or 30 years, and during the term of your policy, the life insurance company cannot increase your rates or decrease your coverage.
While the life insurance companies cannot adjust your policy, some life insurance companies will allow you to decrease your coverage, if needed. In addition, if you decide to cancel your policy, there are no penalties or fees and no further payments are due. These policies are ideal for securing debts or providing an income replacement to your family. If you need permanent life insurance, please continue reading, or skip to here to learn more about term life insurance.
Permanent Life Insurance
As the name implies, permanent life insurance is designed to be permanent and last for your entire lifetime. These polices are usually purchased by someone who wants to protect their assets from estate taxes, leave an inheritance behind, or pay for final expenses and burial costs. There are many types of permanent life insurance coverage but the most common are whole life insurance and universal life insurance. In the next section, we’ll explain some of the pros and cons of whole life insurance.
Whole life insurance is usually sold through the mail or on TV and these policies are generally limited to $50,000 of coverage or less.
Pros of Whole Life Insurance
Whole life insurance policies are very easy to purchase because most companies only ask a few health questions and they do not require an exam for approval. To determine your insurability, the life insurance company you apply with will electronically review your medical records and prescription history. This cuts out “underwriting” time and if everything checks out, the policy is usually approved and mailed to the insured within a week.
Cons of Whole Life Insurance
Unfortunately, not all whole life insurance policies offer life insurance coverage for your entire life. Some whole life insurance companies will guarantee your policy until age 100, but many companies only offer whole life coverage to age 80. In addition, some whole life insurance policies offer fixed rates, while others increase in cost every 1 to 5 years. To further complicate matters, some whole life insurance policies also have 2-year waiting periods before full coverage is offered.
Whole life insurance also tends to be extremely expensive compared to other life insurance products. This is due to their limited health screenings before approval and high cost of advertising their products. Most whole life insurance companies rely on TV commercials, celebrity endorsements, or endorsements from organizations like AARP, and these costs are trickled down to the consumer.
Who Should Buy Whole Life Insurance?
We only recommend whole life insurance to people who are unemployed and cannot financially qualify for term life insurance or guaranteed universal life insurance. Usually, these are applicants with a recent criminal conviction, serious health issues, or heavy cigarettes smokers. If you are in fair or better health, guaranteed universal life insurance is a much better product. Guaranteed universal life combines all of the benefits of term life insurance and the longevity of whole life insurance at a fraction of the cost.
Guaranteed universal life insurance policies are ideal for people who need life insurance to leave an inheritance, pay for burial costs or final expenses, or protect the assets they want to leave behind from estate taxes. We’ll explain more about guaranteed universal life insurance in the next section.
Guaranteed universal life insurance or a “GUL” is a form of permanent life insurance that provides guaranteed rates and coverage like a term life insurance policy. The major difference between term life insurance and GUL insurance is that a GUL insurance policy provides coverage until a set age rather than a fixed number of years.
Guaranteed universal life insurance policies can guarantee your rates and coverage until the age 90, 95, 100, 105, 110, or even 121. These policies require a health screening so they are more affordable than whole life insurance for people who are in fair or better health.
Guaranteed Universal Life and Traditional Universal Life Are Not the Same
Guaranteed universal life insurance should not be confused with traditional universal life insurance. With guaranteed universal life insurance, your rates are guaranteed not to change, and you do not need to pay extra money into your policy to build a cash value. With GULs, there are no investment risks or money management fees; you only pay for the cost of your life insurance, regardless of market fluctuations.
Most estate/trust attorneys and financial advisers recommend GUL policies as a preferable alternative to whole life insurance. Guaranteed universal life insurance policies are ideal for final expenses, leaving an inheritance behind, or protecting your heirs from estate taxes. To illustrate the savings, we’ve compared the cost of a whole life insurance policy to a GUL policy for a 60-year-old male and female in average or “standard” health below.
Actual Rates for Whole Life Insurance vs Guaranteed Universal Life Insurance to Age 100, $50,000
|$50,000 Whole Life Insurance||$50,000 Guaranteed Universal Life|
*Monthly rates are accurate as of 08/15/2017. Both policies offer fixed rates and coverage until the age of 100.
In most cases, guaranteed universal life insurance is roughly half of the cost of a comparable whole life insurance policy for an applicant in average health. If you are in better than average health for your age, the savings will be even more significant. In addition, the more coverage you buy, the greater your discount will usually be.
Most life insurance companies offer $50,000 to $5,000,000 of guaranteed universal life insurance, and these policies are competitively priced with term life insurance coverage after the age of 65.
To learn more about guaranteed universal life insurance, please see our article, “What is Guaranteed Universal Life Insurance?,” or call us directly at 855-902-6494.
If you do not need a large amount of life insurance for the rest of your life, term life insurance may be your best option. If you have a large mortgage, or if you need to replace your income until you reach retirement age, term life insurance is ideal.
Two months ago, we worked with a client named Barry who is his family’s primary income earner. He wanted to purchase life insurance to make sure his family would have money to pay the bills if he passed away and could no longer bring home a paycheck. Barry is 44-years-old, makes about $85,000 dollars a year before taxes, and plans to retire in 20 years at the age of 64.
If Barry passed away today, his family would need about $60,000 per year to pay the bills, the mortgage, and set aside enough each month to retire. Over the next 20 years, Barry’s family will need about $1,200,000 to reach their financial goals. After speaking with Barry, we determined that a 20-year term life insurance for $1,250,000 of coverage would provide him and his family with the income protection they need until retirement age.
Barry is about 30 pounds overweight and he takes blood pressure and cholesterol medication, but we were able to find an A+ rated life insurance policy that would offer him a “preferred” rate class for $126.00 per month. If Barry passes away before retirement, his family will be able to continue living in their home and enjoy a lifestyle that is comparable to their current lifestyle.
What Happens If Barry Outlives His Policy?
If Barry outlives his term life insurance policy, he can let his coverage expire and stop making payments, or he can convert his policy into permanent coverage. For example, if Barry still wants life insurance for his final expenses after age 64, he can decide how much coverage he needs, and convert his term life insurance policy into a permanent policy for this amount.
Most life insurance companies will allow you to convert your entire term policy, for as little as $50,000 to $100,000 of coverage. Best of all, you do not need to prove your current health or insurability – you will be automatically approved at your existing rate class.
Please note: You must convert your term policy into permanent coverage before your term policy ends. In addition, most life insurance companies have a cut-off age where conversions are no longer available, usually between the ages of 65 and 70.
Our agency is nationally licensed and we work with 63 top-rated life insurance companies. Each life insurance company offers different products and different guidelines for approval. By having access to so many companies, we’re able to shop the market to make sure we always match our clients with the best options available.
Whether you’re in excellent health or have a few health issues, we can help. Give us a call today, toll-free at 855-902-6494, or request a free quote online below and compare rates from dozens of life insurance companies in less than a minute.