Term vs. permanent life insurance

What is term life insurance?

Term life insurance is a type of temporary life insurance coverage that is available in different term lengths, usually from five to 30 years. If you die while a term life insurance policy is in force, your beneficiaries receive the face value of the policy as a payout. But if you outlive your policy, you generally don’t get your money back (with the exception of “Return of Premium” term policies).

Term life insurance typically comes with low monthly premiums for a fairly large coverage amount. This is because term life policies have an expiration date, making them much less likely to pay out compared with a permanent life insurance policy. If you outlive your term policy, there will be no payouts.

There are multiple types of term life insurance policies, including the following:

• Level term: Level term policies are the most popular and provide coverage for a specified term length and level premiums (payments don’t change) throughout the policy.
• Renewable term: Renewable term policies are shorter-term policies that increase premiums each year. Renewal is automatic and you don’t have to requalify for coverage, but premiums get more expensive over time.
• Decreasing coverage term: A decreasing coverage term policy has level premiums but a decreasing coverage amount over the life of the policy. These policies are generally used to cover a large debt payoff schedule (such as a mortgage). For example, if you have a $1 million term policy and die while it is in force, the $1 million tax-free payout to your beneficiaries can help pay off a mortgage to lower living costs for your surviving spouse or other dependents.
• Return of Premium (RPO) term: Return of Premium policies will pay back your policy premiums paid throughout the life of the term (minus any applicable fees). This ensures you receive your money back if you don’t exercise the policy coverage. These policies usually come with higher monthly premiums.

What is permanent life insurance?

Permanent life insurance offers coverage for your entire life, meaning there is a payout when you die no matter your age. Most permanent life insurance policies offer a guaranteed death benefit, while some offer additional benefits such as tax advantages, investment options and cash value growth.

Permanent life insurance policies typically carry a cash value that can be withdrawn or borrowed against — making these policies more flexible than term life insurance policies. But once you die you only receive the death benefit from the policy, and the cash value goes to the life insurance company.

There are several types of permanent life insurance to choose from:

• Whole life: Whole life insurance is basic permanent life insurance with level (fixed) premiums, guaranteed cash value and a guaranteed death benefit.
• Variable life: Variable life insurance also provides a guaranteed death benefit, but you can invest your cash value to (potentially) earn higher returns. The cash value still stays with the policy, but you can withdraw or borrow against the policy cash value.
• Universal life: Universal life insurance is a type of adjustable permanent insurance that allows you to adjust your death benefit or monthly premiums while the policy is in force. This gives you more flexibility than a standard whole life policy. You can also invest your premiums if desired, and your cash value can be used to pay premiums after enough cash value has accumulated.
• Final expense: Final expense life insurance — or burial insurance — is a type of guaranteed issue life insurance that offers a low death benefit to help cover the costs of a funeral and burial. These policies tend to be high cost for a very low amount of coverage.

What's the difference between term and permanent life insurance?

Both term and permanent life insurance can help your loved ones financially in the event of your death. But while term policies are a low-cost way to gain temporary coverage, permanent life insurance guarantees a death benefit at a much higher cost.

Here are a few differences to consider between term and permanent life insurance policies:

Cost comparison between term and permanent life insurance

Both term and permanent policies come with an annual premium, and most can be paid monthly. But the costs are very different between the two types of policies.

Term policies tend to be much lower in cost, as they only provide temporary coverage and do not accrue any cash value. This means insurers can offer more coverage for less than the cost of most permanent policies.

Here’s a quick price comparison between term life insurance policies for $500,000 in coverage for a healthy, non-smoking applicant.

While term life quotes are easy to get for free online, whole life insurance policy quotes aren’t usually available to the public and require meeting with a life insurance agent. Based on data from Policygenius, a digital site where consumers can look at options from varied insurance carriers, the average whole life policy for a 30-year-old non-smoking male is $451 per month as of publishing.

As is evident from the above example, permanent life insurance can be much more expensive on a monthly basis than term life insurance. While it’s not an apples-to-apples comparison (whole life accrues cash value and lasts longer), it’s important to compare the total costs between term and permanent policies to find one you can afford.

Which type of life insurance should I get?

It’s not always easy to pick your life insurance policy. You need to review your own financial circumstances and needs before picking a policy. Whether you have a spouse, kids or significant debt — or simply want to leave a financial legacy for your beneficiaries — the decision to pick a life insurance policy will depend on what is discussed with those you care for.

“Choosing between term and permanent life insurance depends on your needs and financial situation,” Griffith Harris, the owner of Griffith E. Harris Insurance Services in Cos Cob, Connecticut, said. “For example, younger individuals with significant financial responsibilities might opt for term insurance due to its affordability. In contrast, those looking for long-term financial planning and estate planning benefits might lean towards permanent policies,” he said.

Buying the right life insurance requires understanding why you need a policy in the first place. It’s important to account for things like:

• Replacing your income
• Paying off a home mortgage
• Providing for your beneficiaries (especially a nonworking spouse)
• Paying for funeral and burial costs
• Donating to charity
• Other needs

Once you determine the reason you need insurance, you’ll figure out what coverage amount is needed and for how long. If you need to pay off a mortgage and provide income for your surviving spouse or beneficiary, you may need a larger policy. But if you just need funds for burial and funeral expenses, you might need a much smaller policy.

You also need to determine whether or not you need life insurance coverage toward the end of your life or if you’re fine with a policy expiring when you get older.

And, finally, you’ll need to know what you can afford. Policy premiums can vary, with term policies being much less expensive. Whole life costs more on a monthly basis but accrues cash value.

Bottom line

Term and permanent life insurance coverage can help you protect your beneficiaries in the event you die as well as provide financial support after you’re gone. But both policies offer different coverage amounts and vary widely in cost, so it’s important to explore both options to find out which type of policy is best for you.

Choosing between term and permanent life insurance requires digging a bit deeper into your personal and financial needs. You’ll want to answer questions about your finances, your long-term financial plans and what the life insurance payout would be used for.

It may be a good idea to meet with a licensed insurance advisor to determine the best type of policy to fit your needs. Just be aware that while most term policies offer low premiums and great coverage, many insurance companies push permanent policies due to their high commissions.