Lesson 2 of 6
Term and permanent coverage, compared
After this lesson, you should be able to
explain how term and permanent coverage are built differently, and name the one question that decides between them.
Most of the confusion about life insurance comes from people comparing two things that were built for different jobs and asking which one is better. It is a little like asking whether renting or buying is better. It depends entirely on how long you need the thing.
Term coverage
Term insurance covers the insured for a set number of years. Ten, twenty and thirty are common lengths, though what is available varies by company and by product. If the insured dies during the term while the policy is in force, the policy pays. If the term ends and the insured is still alive, coverage ends and nothing is paid.
That sounds harsh written down. It is also the reason term coverage generally costs less than permanent coverage for the same death benefit on the same person: most term policies never pay a claim, and the pricing reflects that.
Many term policies include a conversion feature, which allows the owner to convert some or all of the coverage to a permanent policy without new health questions, within limits set by the contract. Whether a policy has it, how long it lasts, and what it converts into all vary. It is a question worth asking before you buy, not after.
Permanent coverage
Permanent insurance is designed to stay in force for the whole of the insured's life, provided the policy's requirements continue to be met. That last clause matters and gets skipped a lot. A permanent policy is not self-sustaining by magic. It has costs inside it, and if it is not funded adequately it can lapse like anything else.
"Permanent" is a category, not a product. Whole life, universal life and indexed universal life all sit inside it and behave differently from one another.
| Term | Permanent | |
|---|---|---|
| How long it lasts | A set number of years | Designed for life, while funded and in force |
| If the period ends | Coverage ends, nothing is paid | Not applicable |
| Relative cost | Generally less for the same death benefit | Generally more, because it is designed to pay eventually |
| Cash value | None | Many, though not all, accumulate it |
| What it suits | An obligation with an end date | A need with no end date |
Cash value
Many permanent policies accumulate a cash value, which the owner can access during their lifetime through loans or withdrawals, subject to the terms of the contract.
Three things about cash value are worth knowing before anyone gets excited about it:
- It is not a savings account and it is not a separate pot of money sitting next to the death benefit. Taking money out generally reduces what is paid at death, and an unpaid loan reduces it too.
- In the early years it is usually small, because the costs of putting a policy in force come out first.
- Some of what a policy illustrates is guaranteed by the contract and some is not. Those are different categories and any honest explanation separates them. If someone shows you a projection without telling you which column is guaranteed, that is the question to ask.
So which one
The question that actually decides it is: how long does this need to last?
A need with an end date, like a mortgage or the years until children are grown, has a shape that term coverage fits. A need with no end date has a different shape. Plenty of households have both kinds at once and end up with both kinds of coverage.
What should make you suspicious is anyone who answers the question before asking about your situation.
| Guaranteed | Non-guaranteed | |
|---|---|---|
| What it is | Promised by the contract | A projection under stated assumptions |
| Can it change | No, within the terms of the policy | Yes, and it may not be met at all |
| Where to look first | This column | After you have read the other one |
| The question to ask | “Show me the guaranteed column.” | “What does the policy do if this is not met?” |
Same household, two different needs
Take the household from the previous page. The mortgage has eighteen years left and the child is six. Both of those obligations end: the mortgage gets paid off, the child grows up. Those are needs with a horizon.
The same household might also want to be certain that a funeral is paid for whenever it happens, which is a need with no horizon at all.
One household, two shapes. That is why the answer is not a product, it is a conversation about what you are trying to cover and for how long.
An invented household, used to show how the idea works. It is not advice and it is not about you.
Check yourself
Nothing is scored and nothing is recorded. Answer in your head, then open it.
Which type is designed to cover a need that has an end date, like the years left on a mortgage?
Term, generally, because the coverage period can be matched to the length of the obligation. That is a structural point about how the two are built, not a recommendation about your situation. Plenty of households hold both kinds at once.
Why does term generally cost less than permanent for the same death benefit?
Because most term policies never pay a claim. The insured outlives the term, coverage ends, and nothing is paid. Permanent coverage is built on the opposite assumption, that it will pay eventually, and the pricing reflects that difference.
Somebody shows you a projection of future policy values. What do you ask?
Which column is guaranteed by the contract, and what the policy does if the non-guaranteed assumption is not met. A projection is a projection under stated assumptions. It is not a forecast and it is not a promise.
The one thing to remember
Neither one is better. The question that decides it is how long the need lasts, and anybody who answers that before asking about your situation has skipped the only step that mattered.
Underneath this lesson
Each of these is a real subject in its own right. They are deliberately not in the beginner sequence, and they are what the Learning Center grows into next.
- Inside permanent coverage Whole life, universal life and indexed universal life behave differently from one another.
- Policy loans and withdrawals How accessing cash value works, and what it does to the death benefit.
- Conversion in detail What converts into what, within what window, and what it costs.
Have a question about your own situation?
This page is general information. What applies to you depends on things a web page cannot know. The conversation is free and carries no obligation to buy anything.
Amber Early, Licensed Life Insurance Agent
CA #4417160 · TX #3543971
Insurance Licensing
Amber Early is an Independent Agent, licensed for life insurance, and is not an employee of any insurance company. This website advertises life insurance. Insurance is the subject of this solicitation.