the words "life insurance" on a paper through the view of a magnifying glass

Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we’ve got ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between term life insurance and permanent life insurance in a way you can understand.

Let’s dive in.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is income tax free to the beneficiary.

Term Life Insurance vs. Permanent Life Insurance

Interestingly enough, life insurance actually comes in a couple of different flavors. In fact, there are two main categories of life insurance: the first is called “term” life insurance and the second is known as “permanent” life insurance. Let’s discuss each.

Term Life Insurance

Term life insurance is exactly what it sounds like. It is life insurance that’s for a period of years; typically a 10 to 30 year period.

Generally, premiums are level and the death benefit is guaranteed for that period of time. At the end of the term, the insurance policy ends and the benefit disappears as well.

Some term life insurance policies, however, have a special benefit that allows you to “convert” the term insurance to a permanent insurance policy without medical underwriting. This can be a tremendously beneficial feature if the insured experiences a health issue that would prevent them from being able to qualify for new insurance after the term policy ends. These convertible term policies cost a little more and take more effort to find but can be worth it depending on your unique circumstances and desires.

Permanent Life Insurance

The second type of insurance category is permanent insurance or whole life insurance. Note: The terms permanent and whole life insurance are used interchangeably.

Just as it sounds, permanent life insurance is designed to last for your lifetime, not just for a period of years. Since it’s designed to last for your entire lifetime, permanent life insurance is more expensive than term.

Permanent life insurance has the benefit of a) lasting longer and b) having a cash value, which is really a living benefit that the policy owner can access before the insured has died. The cash value can be accessed for a variety of reasons (more on this later) and grows without tax.*

Types of Permanent Life Insurance

There are a couple of different types of permanent life insurance contracts to note, including:

  • Universal life
  • Index life
  • Whole life
  • Variable universal life

The difference between them all is how the cash value (the living benefit account) grows. For example:

  • Does it grow based on a dividend? That’s a whole life policy.
  • Does it grow based on an interest rate calculation or declaration? That would be a universal life policy.
  • Does it follow an index, for example, the S&P 500, but with a “floor” and a “cap” mechanism? That would be an index policy.
  • Or, does it involve the market (i.e. mutual fund-like accounts)? That would be a variable universal life policy.

Regardless, all of these policies have the same feature; as long as you continue to pay premiums and cash value remains in the policy, it will last until the death of the insured. 

In the meantime, however, the policy owner can reach in and use the cash value for a variety of purposes. For example, you can use the cash value to help pay premiums in certain years, fund education needs, supplement retirement, and/or support healthcare costs, all without triggering tax.*

These are all things that the policy owner could use the cash value for while the insured is still alive.

A Recap on Term Life Insurance vs. Permanent Life Insurance

To review, the difference between term and permanent is that term life insurance lasts for a period of years whereas permanent lasts as long as you want it to (typically a lifetime).

No matter what type of life insurance you own, however, it is an asset. Moreover, it is an asset class that needs to be reviewed, monitored, and serviced on a regular basis. Why? To make sure that the policy is keeping up with your goals as well as to make sure that the industry and the policy are still performing as anticipated.

Read on to learn about the question, “Can I Change My Life Insurance?

*Please refer to 26 U.S. Code § 7702. These policies are not considered securities. Guarantees are based on the claims-paying ability of the underlying insurance carrier. Policies are not FDIC-insured. Pricing can be based on many factors, including the insured’s age, gender, and health. Please refer to a current policy illustration for details.