Term vs. Permanent Life Insurance: Which Is Better for You?

Life insurance helps protect your loved ones from suffering a devastating financial loss after your death, especially if you pass away unexpectedly. All life insurance policies include a death benefit. If you pass away while insured, your beneficiaries receive a large lump sum payment. They can use this money to cover your final expenses, pay off debt and replace your income.

When you buy life insurance, you have two main types of coverage: term vs. permanent. While both provide a death benefit, they are very different in terms of the features, costs and length of coverage. By understanding how term and permanent life insurance policies compare, you can better determine which suits your financial situation.

What Is Term Life Insurance?

By definition, term life insurance is temporary protection. It's not designed to last forever. When you sign up, you pick how long you want the coverage to last. At most insurance companies, term policies can last for as little as 10 years to as long as 30 years.

Most term policies lock in the same monthly premium for the entire time. For example, a 10-year term policy charges the same amount for 10 years. The longer the term, the higher the initial premium.

At the end of your term, your life insurance coverage ends. You'd need to renew for another policy to stay insured. When it comes to features, term life insurance provides the death benefit, and that's it. The simplicity is what keeps costs low.

Term Life Insurance Benefits & Drawbacks

The main benefit of term life insurance is affordability. You can buy a large amount of coverage for a relatively low premium. For example, a 30-year-old non-smoking woman could buy a $500,000 20-year term policy for less than $20 a month.

Term life insurance is also easy to understand. You pick your death benefit and how long you want coverage. There's nothing else to plan or manage. From there, all you have to do is pay the premiums. Your costs won't increase during the entire term on most policies, which helps you budget. Finally, while term life insurance is temporary protection, many policies allow you to renew for more time without taking another health exam.

Term life insurance is affordable because it doesn't last forever. While you may be able to renew at the end of the term, it gets more expensive each time. Insurers also set a maximum age when you can no longer renew (e.g., no renewals past age 70). Most policyholders outlive their term policies, so their beneficiaries are protected while the coverage is in force but ultimately they don't receive a death benefit. You could end up paying years of premiums without getting any money back for your family.

Finally, term life insurance only includes the death benefit. It doesn't offer a cash value you can use while still alive.

Ideal Candidates for Term Insurance

• Parents and families: Term life insurance may be ideal for people who need a large amount of life insurance coverage at a low cost. Parents of young children are a good example. If you have children and pass away, your family will miss out on many years of your earnings. They might need a six- or even seven-figure policy to help replace your income, cover bills and pay future college education costs. While the cost for that amount of protection is significant with permanent life insurance, it's more affordable through term insurance.
• Mortgage holders: Term life insurance could also make sense if you have a temporary need. For example, if you're paying off a mortgage, you could buy term insurance to match the length of your mortgage loan. Once you've paid off the mortgage, that need goes away, so you may no longer need life insurance.
• Younger applicants: Term life insurance could also make sense if you're younger and have a smaller budget for life insurance. Perhaps you just finished college and have student loans or are worried about burdening your parents with funeral expenses. A term life insurance policy would be more affordable and help protect your family against a big financial hit. You can also lock in a low premium, and your coverage will be ready if you get married, have children or buy a home later. As you advance in your career and have more money in your budget, you could consider a permanent policy.

What Is Permanent Life Insurance?

Permanent life insurance includes any life insurance that does not have a set expiration date¹. By design, these policies can last your entire life, provided you keep paying the premiums.

Many permanent life insurance policies include cash value. This is a reserve of money you can withdraw or borrow from while still alive. You build up cash value as you pay your life insurance premiums over time.

There are different versions of permanent life insurance. Each uses a different approach for the premiums and cash value growth. Some of the most popular include:

• Whole life insurance: Whole life insurance charges the same premium for your entire life. These policies pay a predictable, guaranteed interest rate to grow your cash value.
• Universal life insurance: Universal life insurance lets you adjust the premiums up and down each year. You must cover the underlying insurance cost yearly, which goes up over time. These policies provide price flexibility but take a little more work to manage.
• Variable life insurance: Variable life insurance lets you invest your cash value in "subaccounts" akin to mutual funds. Your growth depends on your investment choices. It's possible to lose money during downturns. While these policies are higher risk, they can produce greater gains.

Permanent Life Insurance Benefits & Drawbacks

With permanent life insurance, you can lock in lifelong protection. You don't have to worry about paying years of premiums for nothing but peace of mind. As long as you keep up with the premiums, your policy beneficiary will get the death benefit one day¹.

Permanent policies also prevent premiums from soaring as you age, the way term likely will. Some policies, such as whole life, even lock in the same premium for your entire life. If you have a cash value life insurance policy, you can use that money for an emergency fund, retirement or to help pay for future college costs.

Permanent life insurance policies offer tax advantages for cash value growth. As long as the money stays in your policy, you delay taxes on your gains. If you borrow the cash value with loans, you can take the money out without paying income tax. The insurer will charge interest on your outstanding loan. If you pass away with an unpaid policy loan, the death benefit will pay it off before the rest goes to your beneficiary income-tax-free.

Permanent life insurance is more expensive than term life insurance. For the same death benefit, you can expect to pay about six to 10 times as much for the starting monthly premium. Permanent life insurance policies can also be more complicated to set up and manage. There are more types to choose from, and you need to compare policies based on both their costs and cash value growth.

Finally, if you withdraw or borrow cash value from your insurance policy, it reduces the death benefit for your beneficiaries.

Ideal Candidates for Permanent Insurance

• People who want to leave an inheritance: Permanent life insurance makes sense for insurance needs that never go away, such as paying for your final expenses or leaving an inheritance to your loved ones. With permanent life insurance, you know it'll eventually pay a death benefit to help address these needs.
• People close to retirement: Permanent insurance could also make sense as you get older and closer to retirement. If you had a term policy during your career, it could be getting close to expiring. At this point, your kids likely have grown up, and your mortgage is close to being paid off. You could replace your term policy with a smaller permanent policy that won't expire.
• High-earners: Finally, permanent insurance makes sense if you have a larger budget and can afford the higher premiums for more benefits. Permanent life insurance makes even more sense if you've maxed out your retirement plans. You could then use permanent life insurance to build more tax-deferred savings, similar to a Roth individual retirement account.

   Compare life insurance plans to fit for your needs. Get a Life Insurance Quote  

Choosing the Right Life Insurance for You

As you try to decide whether term vs. permanent life insurance is right for you, consider these factors:

• Your goals for life insurance: If you want life insurance protection for a temporary need, such as your mortgage, replacing some of your income or helping protect your young children, term is likely the better option. If you want coverage for a need that won't go away, such as leaving an inheritance or paying for final expenses, permanent is likely the better option.
• Your total coverage needs: Think of how much life insurance you need to provide financial security for your loved ones. If you are underinsured, you could leave them at risk. If you can only afford the full amount with term life insurance, that's better than covering a partial amount with permanent coverage. In other words, if you need $500,000 in a death benefit to protect your family, don't settle for $50,000 of permanent because it's all you can afford. Get the entire $500,000 in term instead.
• Your other retirement accounts: If you haven't maxed out your other retirement accounts, using term life and investing your premium savings may be better. If you're maxing out your retirement accounts and would like to save more, permanent coverage would allow you to do so.
• Your budget: Cost is a significant difference between term and permanent life insurance. If you can afford the higher premiums, permanent life insurance does deliver more than term life insurance. You get lifelong death benefit protection plus the cash value.
• Your age: Term life insurance makes more sense for younger people starting their families and careers. It's a way to get considerable death benefits at affordable prices. Permanent life insurance can make more sense as you get older. You can then lock in coverage that will provide for your future final expenses and a possible inheritance. Most insurers don't allow people to buy term life insurance past age 75.

Comparing Term and Permanent Life Insurance

To compare your options for term and permanent life insurance, you need to see how much each one costs. Insurers set different prices for each applicant. Your cost depends on various factors, such as your age, health, hobbies, occupation and the amount of coverage needed.

You can apply for free life insurance quotes. Insurers provide online quotes for term insurance. You usually need to apply with a human financial representative to see how much permanent coverage costs. The insurer would then give you a price quote. For permanent policies, it would also predict how much your cash value will grow over time.

With this information, you can adequately compare whether term or permanent life makes the most sense based on the cost and benefits.

Setting Up the Right Life Insurance Coverage

There is no one-size-fits-all solution for life insurance. Some people are better off with term, some with permanent and some with a combination. Spend time researching your options to find the ideal fit for your needs.

For more information, contact a financial professional. You can discuss whether term or permanent life insurance is the better approach. Once you decide, they can submit your application to start the coverage process.

   Explore your life insurance options today for your family’s future! Get a Life Insurance Quote  

Footnotes

1. Policies may be subject to maturity provisions.
2. Withdrawals may be subject to charges, withdrawals of taxable amounts are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty.
3. Interest is charged on loans, they may generate an income tax liability, reduce the Account Value and the Death Benefit, and may cause the policy to lapse.