The term versus permanent life insurance debate has been going on for years. Since both can be effective ways to help protect your loved ones, this article explains the differences between the two types of coverage, so you can make an educated decision about which works best for you.
What’s the difference between term and permanent life?
Like all life insurance policies,term insuranceand permanent insurance were created to protect the financial well-being of your loved ones in case you pass away. What makes them different, however, comes down to a few basic factors: how long the coverage lasts, the features and benefits they offer, and how the premiums (your payments) are structured. Let’s take a look at how they compare.
How long does the protection last?
Permanent life insurance: As the name suggests, permanent life policies (such as whole life) are designed to provide long-term—often lifelong—coverage. As long as you continue to pay your premiums, your coverage will be there for you whenever you need it.
Term life insurance: Conversely, term life policies provide temporary protection that lasts for a set period of time (the term). In many cases, the coverage can be renewed, but only up to a specific age, and your premiums will generally go up with each renewal.
What benefits do I get?
Permanent life insurance benefits:
These policies generally offer long-term death benefit protection and a host of potentially valuable features. In particular, most permanent life policies give you the opportunity to build cash value. This feature can be especially helpful later in life since the cash value you accumulate can be accessed to help pay for unexpected emergencies or milestone events like college and retirement.1
Term life insurance benefits:
With term coverage, you get short-term death benefit protection (often 10, 15, or 20 years), and your beneficiaries will receive a lump-sum death benefit if you pass away during this time. While term life does not offer any cash value accumulation, some policies come with flexible features that allow you to use your benefits early if you become terminally ill2or will help pay your premiums if you become disabled.3
How much does the coverage cost?
Permanent life insurance costs:
Since each type of permanent life insurance uses a different payment method, let’s focus on the most common,whole life. With whole life coverage, your premiums are locked in at the time of purchase and are guaranteed not to go up. As a result, whole life coverage may start out more expensive than term, but in the long run it may prove to be a better value.
Term life insurance costs:
With term coverage, your premiums are locked in for the period of coverage you select. If you choose to renew your coverage, the premiums will increase annually. That’s why it’s important to carefully consider your time frame and select the length of coverage that fits your needs and budget.
How do I know which coverage is right for me?
Choosing one type of coverage over another can be difficult—especially if this is your first time purchasing life insurance. Since everyone has a unique set of needs, we recommend working with a New York Life agent. That way, you can go over all the information together and make sure you come up with an educated decision. In the meantime, the following guide may prove helpful:
Consider permanent life insurance if you:
- Need long-term financial protection.
- Would like to create an inheritance for your heirs.
- Could use a tax-advantaged way to save for future expenses.4
- Prefer stable premiums (available with whole life)
Consider term life insurance if you:
- Need short-term coverage or additional protection during specific times.
- Are just starting out or are on a budget.
- Want some flexibility in case your needs or circ*mstances change.
- Have other financial assets to leave behind as an inheritance.
Term vs. permanent life insurance FAQs
1Accessing the cash value will reduce the available cash surrender value and death benefit.
2The Living Benefits Rider is an included feature on all term policies, but there is a cost to exercise this rider.
3The Disability Waiver of Premium feature can be added for an additional cost.
4The cash value component of a whole life policy grows tax deferred. Which means while the cash value grows you do not pay income taxes on it, allowing it to grow even faster. The cash value is yours to use during your lifetime and you can access it usually income tax free.
FAQs
Permanent life insurance covers you as long as you continue paying the premiums, so it's typically more expensive than term life insurance. This type of policy might make sense if you don't have an end point in mind. For example, if you have children with special needs or want to leave an inheritance to your heirs.
Which is better, term or permanent life insurance? ›
While term life insurance is initially less expensive, permanent life insurance may be more efficient in the long run. That's because permanent life insurance never needs to be renewed, and your rates will not be adjusted as you get older.
Should most people consider term rather than permanent life insurance? ›
Term life insurance offers more affordable coverage than whole life. However, it only lasts for a certain number of years, and it doesn't offer the tax-free savings component that whole life has.
Is it better to have whole life or term life insurance? ›
If you're on a budget and just want to provide coverage for your family, term life plans are often the most cost-effective option. On the other hand, if you're looking for lifelong protection with more investment potential, then whole life insurance may be a better choice.
Why do many experts recommend term life insurance over whole life insurance? ›
You want (or need) more cost-effective coverage: Term life insurance typically comes with more cost-effective monthly premiums than whole life insurance— especially if you're young and healthy. For some, this may be desirable, while for others it's all they can afford.
What is the best age to get permanent life insurance? ›
As we age, we're at increased risk of developing health conditions, which can result in higher mortality rates and higher life insurance rates. You'll typically pay less for life insurance at age 25 than at age 40. Waiting until age 60 may mean an even bigger rate increase and limited policy options.
What happens if I outlive my term life insurance? ›
When your term life insurance plan expires, the policy's coverage ends, and you stop paying premiums. Therefore, if you pass away after the policy ends, your beneficiaries will not be eligible to receive a death benefit.
What is a drawback to permanent life insurance? ›
While there are many whole life insurance benefits, there are some drawbacks—like higher premiums (compared to term life insurance), lack of flexibility, slower growth and potential penalties. Consider these as you choose the best product for your needs and lifestyle.
Why is term life insurance not worth it? ›
When is term life insurance not worth it? Term life insurance probably isn't worth the costs if you don't have any significant debts to pass on to your loved ones or you don't have dependents or a spouse that you'd leave in a bind by passing away.
What is the main disadvantage of term life insurance? ›
If your health declines, you may not be able to get another policy after your term ends. Term life does not have cash value that can be tapped into while you're still alive.
However, if you have a serious health condition that would make a new life insurance policy difficult or nearly impossible to get, converting your term life policy to whole life just might be your best bet.
What is the best age to buy term life insurance? ›
Anyone between the ages of 18 to 65 can opt for term insurance. However, your 20s is a good time to get into the insurance market and plan for your family's future. Since most people land their first jobs in their 20s and start earning a basic amount, they have relatively lower incomes and quite a few expenses.
When should you stop term life insurance? ›
If your mortgage is paid in full or your family's savings and supplemental income are enough to keep up with payments, you could consider canceling your term life coverage.
Why do insurance agents push whole life insurance vs term life insurance? ›
Term life insurance is much more affordable because it only lasts a set term and includes no cash value component. So, sales reps may try to push a whole life policy, which is life insurance that lasts until the policyholder's death and includes a tax-advantaged cash value savings component.
At what point does life insurance not make sense? ›
Once your children are older, and your debts are paid, it might not be as crucial for you to have life insurance coverage for that purpose. Term life insurance is typically less expensive than other types of life insurance.
What life insurance does Dave Ramsey recommend? ›
Zander Insurance Is RamseyTrusted
It means Zander is the only company Dave and the entire Ramsey team trusts to help you find term life insurance. They've faithfully served over 600,000 folks in the last 25 years. And they'll help you find the right policy too.
Can you cash out a term life insurance policy? ›
So, you can't cash out term life insurance.
What is the biggest advantage of term life insurance? ›
The main benefit to level term life insurance is that it is very affordable, with low monthly premiums and the ability to cover you for the period of time most important to you. Your beneficiaries can use the death benefit to pay for anything from a mortgage to education expenses.
