Understanding Term and Permanent Life Insurance
Choosing the right life insurance is important. And there are a lot of options. To help you do your research, we’ve covered some of the biggest questions here.
What’s the Difference Between Term and Permanent Life Insurance?
Term Life Insurance
Term life insurance is much like renting a house, because it provides your loved ones with financial protection for a specific term or period of time. Let’s say that you purchase a $500,000 term policy that provides protection until age 80. If you die prior to age 80, your loved ones will receive the $500,000 death benefit. If you outlive your policy, it will expire and your coverage will end. You essentially “rented” your policy until age 80 and were left with no “equity” when it expired.
Permanent Life Insurance
Permanent life insurance provides you with lifelong coverage and is more like owning your home. You build equity and can access that equity via a loan (your home is the collateral) or by selling your house. Permanent life insurance is very similar. The equity (collateral) in your policy is the cash value. You can use the cash value by taking a loan1 (paying interest like a home loan) or by selling (cashing in) your policy.
* Term life insurance may earn some minimal dividends that can be applied to reduce premiums. Dividends are not guaranteed, but Northwestern Mutual has paid them every year since 1872.
Utilizing the life insurance cash values through policy loans, surrenders of dividend values or cash withdrawals will or could reduce the death benefit, necessitate greater premium outlay than anticipated and/or result in an unexpected and/or adverse taxable event.
Term First, Permanent Later?
Because of its affordability, many people purchase term life insurance and then, as their income increases, convert some or all of the policy to permanent life insurance. Many term life insurance policies offer the option to convert to permanent life insurance—without having to take an additional health exam. That means even if your health declines, you won’t be denied coverage and your new premiums will based on your health status when you initially bought the term policy. Talk to one of our experts to learn more.
See policy for specific details on age ranges, partial conversion rights and minimum amount requirements.
Permanent Life Insurance Options
Permanent life insurance products come in many shapes and sizes, with features you can customize and even add-ons you can pick and choose. Here’s a quick menu of the types of permanent life insurance policies we offer at Northwestern Mutual:
You can customize your life insurance even more by choosing add-on options like:
What Type of Life Insurance Is Best?
Life insurance isn’t "one-size-fits-all." Your life insurance needs to fit your life. “What kind should I buy?” is an important question, but it’s not the first to ask when preparing to buy life insurance. It comes after these four:
- Why do I need life insurance? The primary reason people buy life insurance is to provide for loved ones when they die—to pay for burial expenses, help loved ones maintain their current life style or to pay for a child’s college education.
- How much coverage do I need? Life insurance is one of the few insurance products that require a health exam. A health scare or the diagnosis of a chronic medical condition could make it difficult for you to afford or qualify for the coverage you need. That is why it’s best to purchase life insurance with a forward-looking view—not just what you need today, but what you’ll need 5, 10 or 20 years from now.
- What is my budget? If you have budgetary restrictions and the amount of insurance you need can be bought today only by purchasing term insurance, you should buy term insurance. The worst-case scenario would be buying insurance that is too expensive and determining shortly thereafter you cannot afford it and letting your policy lapse.
If term insurance is being purchased, make sure you ask if your policy can be converted to a permanent policy. Many term policies have the option for a certain period of time to convert some or all of it to permanent life insurance without taking another health exam.
If you’re beginning the buying process with budget flexibility, you can consider the full range of options—from lower-cost term insurance to permanent policies that offer more benefits. As your income grows and your needs evolve, purchasing a term insurance policy with conversion privileges is key to making sure your insurance has the flexibility needed to grow with you.
- What are my other financial priorities? The decision to buy life insurance should never be made in isolation. You need to look at your overall financial needs if you were to die and determine how much you can spend on life insurance relative to other financial commitments.
Once you’ve asked and answered these questions, you’ll be ready to make an informed life insurance purchase.
We’d like to help. Connect with one of our experts to see which kind of life insurance and how much is right for you.
How Much Life Insurance Do You Need?
It depends. The amount is as personal as the future you want for you and your family—as well as your budget. Questions like these can help you develop an estimate:
- How much money will be needed for your funeral and burial costs?
- What debts will you leave behind (mortgage, credit cards, etc.)?
- If you have children who will go to college, how much do you plan to contribute to their education?
- How much money would your family need to stay in their home and maintain their current lifestyle?
- Have you had a change in your family status, such as marriage, divorce or birth of a child?
See how one good question leads to another? Eventually, your answers will lead to an insurance solution that offers the coverage you need—nothing more, nothing less.
The Right Coverage for Life and Death
Talking about life insurance usually means talking about death, which most of us would prefer to avoid for as long as possible. Thinking about the end of your life and how it will affect those you love is uncomfortable.
But the very purpose of life insurance is to make you and your loved ones more comfortable. The right coverage provides money to help pay expenses when you’re gone. And in some cases, permanent life insurance (which includes whole life insurance) becomes a financial asset—like a home or land—you can use before you die.
Afford your children's education
Honor your legacy by funding a family dream or charity
Maintain a similar lifestyle after losing you
Pay bills such as mortgage or other debt
Pay for your final expenses, such as funeral and medical
Life insurance offers a sense of security that is valuable on its own. And depending on the type of policy you choose, life insurance can also provide financial value before you die. It’s more than a safety net; it’s a foundation for financial security.
Clearly, You Have Options
Somewhere in the mix of all these options is a life insurance policy that will meet your unique needs—and that you can afford. Want to understand these options in greater detail before you make a purchase? Connect with one of our experts to see which kind of life insurance is right for you.