Term vs Permanent Life Insurance: What’s the Difference?

While term life insurance expires, permanent life never does, but it carries significantly higher premiums. Below, we settle the term vs permanent life insurance debate.

When you have loved ones who rely on you, life insurance is a must to ensure they’re taken care of no matter what. There are two types of life insurance: term life and permanent life. Permanent life insurance is much more expensive but lasts longer.

Shoppers are often interested in permanent life insurance because it seems more comprehensive. Yet it’s important to balance the cost against your ability to build a nest egg for the future and consider how long you truly need life insurance. 

So — is term or permanent life better? In this guide, you’ll learn about both types, and how to choose between term or permanent life insurance.

Term vs. Permanent Life Insurance: What’s the Difference?

The main difference between term and permanent life insurance is that term life provides coverage for a set period of time such as 20 or 30 years, while permanent life covers your entire life. Permanent life doesn’t expire, so it’s significantly more expensive, with premiums costing about five to 20 times more.

The averages above are based on all age groups. Your actual premium will vary depending on your age, health, and other factors.

Term vs. Permanent Life Insurance: Which Is Better?

“For most people, term life insurance is the most cost-effective and appropriate type of coverage,” says Natalie Taylor, CFP®, BFA™. Depending on your age and gender, a permanent life policy for $1 million could cost $640 to $1,650 per month whereas a term life policy would cost a fraction of that amount and could provide coverage until retirement when you’ve reached financial independence. Instead of paying the high cost of permanent life insurance, you could put those extra funds into investment vehicles to build wealth instead.

While permanent life insurance doesn’t expire, most people don’t need life insurance forever. Coverage is important when others rely on your income and you haven’t saved enough to cover a loss. But once your children reach adulthood and establish careers, and you’ve saved enough to retire, you won’t likely need life insurance anymore.

That’s why in the debate between term life vs. permanent life, term is usually the clear winner.

Exceptions

You may still want to consider permanent life insurance if:

• You want to guarantee a death benefit to your beneficiaries, regardless of your age.

• You can’t build a nest egg to pass on to your children.

• You have a special needs child.

• You have a pension and can use a whole life policy to maximize your pension payout.

Pro Tip: If you do choose permanent life insurance, make sure to compare the different options on the market, since prices and benefits can vary significantly.

What Is Term Life Insurance?

Term life insurance is a contract that lasts for a set time and pays a benefit upon the death of the insured. As the policyholder, you pay premiums to the life insurance company. If you die during the coverage period, the company pays your spouse, children, or other designated beneficiaries at tax free benefit.

When you purchase a term life policy, you choose the term length and the death benefit amount. For example, if you choose a 20-year, $1,000,000 policy, then the policy will last for 20 years and pay $1,000,000 to your beneficiaries if you die during that time period. A longer term length or a higher death benefit will increase the price.

When comparing term vs. whole life insurance, term life has one huge advantage: cost. Term is much cheaper than whole life insurance, so you can get the coverage you need without expensive premiums. But it’s important to choose a term length long enough to cover the time period until your kids are through college and you and your partner have saved up enough to retire.

Term Life Insurance Rates

Here are average monthly rates for $1 million in term life insurance for male and female non-smokers, according to Policygenius.

Pro Tip: While the table above will give you a good benchmark, your actual term life insurance rates will depend on a medical examination — a typical part of signing up for life insurance.

What Is Permanent Life Insurance?

Permanent life insurance is insurance where you pay premiums for your entire life, and the insurance company pays a death benefit to your beneficiaries when you die. A permanent life insurance policy doesn’t expire. As long as you pay your premiums, your beneficiaries receive a payout.

In addition, permanent life insurance builds cash value as you pay into it. Once your policy has enough cash value, you can withdraw from it or borrow against it, depending on your policy’s specific rules.

You can also cash out or “surrender” permanent life insurance. When you do this, you receive the surrender value (your policy’s cash value after the provider takes out surrender fees, which normally decrease over time).

Whole life insurance is the most common type of permanent life insurance. 

Universal Life Insurance

Another type of permanent life insurance is universal life insurance. The main difference in universal life vs. whole life is that universal offers more flexibility. Here are the most common types of universal life and how they work:

• Universal life insurance: This kind of life insurance lets you increase or decrease the coverage amount, adding flexibility for how much you pay in premiums.

• Indexed universal life (IUL) insurance: The cash value of an IUL policy earns interest. The rate is based on an investment index chosen by the provider.

• Variable universal life (VUL) insurance: You can use sub-accounts to invest the cash value of a VUL policy, choosing investments from funds offered by the insurance provider.

Whole Life Insurance Rates

Here are average monthly rates for $1 million in whole life insurance for male and female non-smokers, according to Policygenius.

How Much Life Insurance Coverage Do You Need?

If anyone depends on your income and you don’t have substantial savings, set a rough coverage amount for life insurance at:

• $25,000 for final expenses

• 100% of debt that isn’t forgivable at death

• The amount needed to fully fund your emergency fund

• The amount needed to fully fund college savings for your children

• The amount needed to replace your gross income for at least five to 10 years

What if you can’t afford that much life insurance yet? In that case, you have a couple of options. You could start by getting just enough life insurance to cover basic needs, meaning:

• $25,000 for final expenses

• 100% of debt that isn’t forgiven at death

• One year of gross income (if anyone else depends on you)

What to Do After Buying Life Insurance

Once you decide between term vs. permanent life insurance and get a policy, there are a few important steps to take:

• Make sure your beneficiaries know about the policy and have access to it. That way they can notify the insurance company in the event of your death.

• Put your life insurance premiums on autopay. Missing a payment could cause your coverage to lapse. The simplest way to avoid this is to set up automatic payments.

• Consider paying your premiums annually. According to Taylor, “paying life insurance premiums annually is usually about 5% to 8% cheaper. So if paying up front works for your cash flow, this is a simple way to pay less.”

You should also reassess your needs every year or two. If your circumstances change, you may need to adjust your life insurance accordingly. For example, if your family grows, you’ll likely need more coverage. Term life policies (and some whole life policies) allow you to add insurance riders to increase or extend your coverage.

Find the Right Life Insurance Policy for Your Needs

Now that you know the different types of life insurance, decide whether term vs. whole life insurance is the better fit. By setting up a life insurance policy with a benefit that covers your family’s needs, you can ensure your loved ones are taken care of in any situation.

Intuitive software like Monarch Money can help you budget for life insurance while you work towards your long-term financial goals.