Term or Permanent Life Insurance: Choose the Coverage That Fits Your Family

Term life insurance covers you for a set number of years. Permanent life insurance, including whole life, stays in force as long as premiums are paid and has a cash-value account. Choosing between them comes down to how long you need coverage and what premiums fit your budget.

Our team at NR CPAs & Business Advisors, a Miami CPA firm, helps Florida families and business owners compare these two types. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

What is term vs permanent life insurance?

Term life insurance pays a death benefit only if the insured dies during a set period. Permanent life insurance lasts for the insured’s whole life, as long as premiums are paid.

The Oregon Division of Financial Regulation explains that term has no cash value. Permanent coverage has a cash-value account that can be borrowed against or withdrawn from.

Term life insurance

• Covers a term you choose.
• Has no cash value.
• Ends when the term ends, unless you renew or convert under the policy terms.

Permanent life insurance

• Stays in force while premiums are paid.
• Has a cash-value account.
• Whole life is one form of permanent coverage.

FINRA contrasts term’s limited coverage period with the lifetime coverage and cash-value feature of whole or permanent life insurance.

How do term and permanent policies compare?

The main differences are how long coverage lasts, whether a cash value builds, and how premiums work. Compare both types with the same death benefit amount so the numbers match.

New Jersey’s Department of Banking and Insurance compares the two types on coverage duration, death benefits, cash values and premium differences. Its side-by-side view is a useful check.

Which policy features should you check before you buy?

Check the cash value rules, surrender charges, the contestability period, the grace period and lapse notices. These features decide what happens after you buy.

Surrender charges

A surrender charge can apply if you cash out a permanent policy early. FINRA’s guidance on exchanging a life insurance policy explains that surrender charges, cash value and replacement all matter in that decision.

If an agent recommends surrendering an annuity or life insurance policy with cash value, and does not recommend using the proceeds to fund or purchase another annuity or life insurance policy, Florida requires written information first. That information, which applies when an agent recommends surrender and does not recommend using the proceeds to fund or purchase another annuity or life insurance policy, includes the estimated surrender charge, possible tax consequences and any forfeited death benefit, under Fla. Stat. § 627.4553.

The contestability period

Florida law says every insurance contract must become incontestable after it has been in force for 2 years from its date of issue. The law lists exceptions, including nonpayment of premiums. See Fla. Stat. § 627.455. FINRA also notes the typical two-year contestability period.

The grace period

Florida requires a grace period of at least 30 days to pay any premium after the first. The policy stays in force during that grace period. See Fla. Stat. § 627.453.

Lapse notice for older policyowners

For a policy issued in Florida on or after October 1, 1997, covering a person 64 or older and in force at least 1 year, the insurer generally may not lapse the policy for nonpayment unless, after the grace period ends and at least 21 days before the lapse takes effect, it has mailed a lapse notice to the policyowner and any designated secondary addressee. The statute lists exceptions, so review it for your situation under Fla. Stat. § 627.4555. The notice also goes to a secondary addressee the owner has designated in writing by name and address. The statute lists exceptions, so review it for your situation under Fla. Stat. § 627.4555.

How do federal tax rules affect the choice?

Death benefits paid because of the insured’s death are generally excluded from gross income. The main exception is the transfer-for-value rule. Under IRC § 101(a), gross income does not include amounts received, whether in a single sum or otherwise, under a life insurance contract, if such amounts are paid by reason of the death of the insured.

Other rules change the picture for estates and businesses:

• IRC § 101 is an income tax rule: gross income does not include amounts received under a life insurance contract if they are paid by reason of the death of the insured. IRC § 101 does not address estate inclusion; it provides that gross income does not include amounts received under a life insurance contract if paid by reason of the insured’s death.
• Premiums: IRC § 101 excludes from gross income amounts received under a life insurance contract paid by reason of the insured’s death. The rule that premiums are not deductible when the taxpayer is directly or indirectly a beneficiary is in IRC § 264, not IRC § 101. This matters for key person and business-owned coverage. Under IRC § 264(a)(1), no deduction is allowed for premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.
• Policy definition: A policy must meet the federal definition of a life insurance contract. Under IRC § 7702, a contract is a “life insurance contract” for purposes of the Internal Revenue Code only if it is a life insurance contract under the applicable law and it either meets the cash value accumulation test or meets the guideline premium requirements and falls within the cash value corridor.

The basic exclusion amount is $15,000,000 under IRC § 2010(c)(3)(A), and the IRS revenue procedure is a separate IRS document. The gift tax annual exclusion is $19,000 per donee, per the IRS gift tax FAQ. Families with larger estates use these figures when they plan.

Who should compare these options?

Anyone who needs coverage for a set time, or for life, should compare both types. That includes families, professionals and business owners.

Many H-1B visa holders, expatriate professionals and NRI households ask whether term or permanent coverage fits a move, a job change or a future move back home. We help with the insurance side of those questions through NRI life insurance.

Business owners often compare key person and buy-sell coverage against personal term or permanent policies. The tax rules above apply differently to each.

How does a coverage review work?

A coverage review is our first meeting with you. It moves in five steps:

1. You share your family or business goals and any policy you already own.
2. We compare term and permanent options at the same death benefit.
3. We review the tax, cash-flow and policy terms in plain words.
4. If an agent recommends surrendering an annuity or life insurance policy with cash value and does not recommend using the proceeds to buy another policy, you receive written information before the surrender.
5. You decide what, if anything, to do next.

Before any engagement, we explain our fees and any insurance commission in writing.

If you replace a policy, federal law generally recognizes no gain or loss on a life insurance exchange. Under IRC § 1035(a), no gain or loss is recognized on the exchange of a contract of life insurance for another contract of life insurance or for an endowment or annuity contract or for a qualified long-term care insurance contract. Still, compare surrender charges, the new policy’s contestability period and the written information Florida requires before you switch.

Why work with NR CPAs & Business Advisors?

NR CPAs & Business Advisors is a Miami CPA firm. We pair a CPA’s view of tax and cash flow with life insurance planning for families and business owners.

Our team supports Nischay Rawal, who acts as the licensed insurance agent for these coverages. We offer whole life, term life, key person, buy-sell, estate planning life and NRI life insurance.

Frequently asked questions