The short answer
Term life insurance covers you for a set number of years and usually costs the least for the most coverage, so it is the usual fit for needs that end, such as raising children or paying off a mortgage. Permanent life insurance is built to last for life and builds a cash value, at a much higher premium, so it fits needs that never end. Many families use both.
The choice between term and permanent life insurance is often presented as a debate, with strong opinions on both sides. It is really a question about time: how long will the need you are insuring last? Answer that honestly and the choice usually becomes clear.
Before you compare policies, know roughly how much coverage your family needs. Our guide to how much life insurance you actually need walks through the method.
How term life insurance works
A term policy covers you for a fixed period, often 10, 20 or 30 years. With a level term policy, the premium stays the same for that period. If you die during the term, your beneficiaries receive the death benefit. If you outlive the term, the coverage ends and nothing is paid.
That last point is not a flaw. Term is pure protection, which is why it is the least expensive way to buy a large amount of coverage for the years your family depends on your income. A few features are worth checking:
- Renewal. Many term policies can be renewed when the level period ends, but at a much higher premium that keeps rising each year.
- Conversion. Many term policies let you convert some or all of the coverage to a permanent policy without new medical questions, within a window set by the policy. If your health changes, that option can be valuable. Check how long your conversion window lasts and which policies you can convert to.
- Return of premium. Some term policies refund premiums if you outlive the term, for a noticeably higher premium.
How permanent life insurance works
A permanent policy is designed to last for the rest of your life, as long as it stays funded. Part of what you pay builds a cash value inside the policy. You can borrow against that cash value or withdraw from it, though loans and withdrawals reduce the death benefit and, if poorly managed, can cause the policy to lapse.
There are several kinds:
- Whole life has fixed premiums and a guaranteed cash value. Some whole life policies also pay dividends, which are not guaranteed.
- Universal life has flexible premiums within limits. The cash value earns interest at a rate the insurer declares, and the policy can lapse if it is not funded enough. A variation, guaranteed universal life, focuses on a guaranteed death benefit to a chosen age and builds little cash value.
- Indexed universal life (IUL) is universal life whose cash value is credited interest based on a market index’s change, usually within a cap and a floor. Charges still come out every year. Our guide to indexed universal life, explained honestly covers how it works.
- Final expense is a small permanent policy meant to cover funeral and end-of-life costs.
Side by side
| Term life | Permanent life | |
|---|---|---|
| How long it covers | A set period, such as 20 years | For life, if it stays funded |
| Premium for the same coverage | Lowest | Much higher |
| Cash value | None | Builds over time; can be borrowed against |
| If you stop paying | Coverage ends | Depends on the policy; some cash value may remain or keep it going for a while |
| Often fits | Income replacement while children are young; the mortgage years | Lifelong needs; leaving a set amount to heirs; some business plans |
When term usually fits
Term is usually the right starting point when the need has an end date:
- Replacing your income while children are growing up
- Making sure the mortgage can be paid off
- Covering the years before your savings could support your family on their own
It also fits when the budget is tight. A young family, a household that has just arrived in a new country, or a resident physician carrying student loans is usually better served by enough term coverage today than by too little permanent coverage.
You will hear the phrase “buy term and invest the difference”. It can work well, if you really do invest the difference, consistently, for decades. The plan only works if the second half happens.
When permanent coverage can make sense
Permanent coverage is worth a look when the need will not go away:
- Final expenses that your family will face whenever you die
- A dependent who will always need support, such as a child with special needs
- Leaving a set amount to children, grandchildren or a cause you care about
- Business plans that need coverage for as long as an owner lives, such as some buy-sell agreements. Our guide to key person coverage and buy-sell funding explains those.
It usually only makes sense once the basics are in place: an emergency fund, and the confidence that you can keep funding the policy for years. A policy and a workplace plan are separate buckets of money, and we encourage everyone to take any employer match on offer. Permanent policies carry surrender charges in their early years, so they suit money you will not need back soon.
Using both: a ladder
You do not have to choose one type for everything. Many families split their coverage so that it shrinks as their needs do.
A made-up family needs $1,000,000 of coverage today, but expects the need to fall as the mortgage is paid and the children grow up. Instead of one large policy, they buy two term policies and a small permanent one.
| Years | Coverage in force | What is covering it |
|---|---|---|
| 1 to 20 | $1,000,000 | $500,000 20-year term, $450,000 30-year term, $50,000 permanent |
| 21 to 30 | $500,000 | $450,000 30-year term, $50,000 permanent |
| After 30 | $50,000 | The permanent policy, for final expenses |
The coverage steps down as the need does, and the family pays for the large amounts only during the years they matter most.
Made-up, rounded figures to show the method. Not a quote, an illustration of any policy, a prediction, or anyone’s real situation.
Questions to ask before you choose
- How long will this need really last?
- What premium can I pay comfortably for the whole term, or for life?
- For a term policy: can it be converted, until what age, and to which policies?
- For a permanent policy: what are the charges each year, and what happens if I pay less than planned?
- What do the guaranteed figures show, as well as the projected ones?
- How strong is the insurer financially? Independent rating agencies publish their view.
Start from the number
The right type of coverage follows from the size and length of the need, so begin there. The free Life Insurance Needs Calculator gives you a first estimate in about a minute.
When you are ready, a free strategy session compares term and permanent options from several insurers side by side, with the costs and trade-offs of each in view. If permanent coverage is not right for you, you will hear that too.
