More on Life Insurance
More on Life Insurance
Term life insurance is cost-effective and eventually expires, whereas permanent insurance is costly, but has no expiration date. Here’s how to decide which is best for you.
Published January 19, 2021
TABLE OF CONTENTS
Once you’ve calculated how much life insurance you need, you’ll need to decide what kind of life insurance policy is right for you. The two main types of life insurance are term life insurance and permanent life insurance.
Both term and permanent life insurance pay out a tax-free death benefit if you die while your policy is active. Term life insurance is active for a limited period, called the term, whereas permanent life insurance lasts as long as you continue to pay your premiums. Term life insurance is the best choice for most people, but if you have complex finances or a lifelong dependent, you may consider a permanent policy.
You’ll pay more for permanent life insurance than you would for a term policy with the same coverage amount
Permanent life insurance lasts the rest of your life and comes with a cash value savings component
Different types of permanent insurance grow the cash value in different ways
Term life is best for most people, but permanent insurance is good for high-earners with long-term financial obligations
|FEATURES||TERM LIFE INSURANCE||PERMANENT LIFE INSURANCE|
|Cost||$20-30/month||Varies by policy type, 5-15x term life rates|
|Guaranteed death benefit||Yes||Yes|
|Guaranteed cash value||No||Yes|
|Premiums||Level||Stays level or changes based on cash value accumulation|
|Risks||Eventually expires||High premiums are difficult to budget long-term; cash value has low rate of return|
|Best for||Most people whose financial obligations decrease over time||People with lifelong dependents, high-income earners, and people subject to estate tax|
Term life insurance policies last up to 30 years and are typically the most affordable life insurance option. Based on Policygenius data from January 2021, a 35-year-old male could buy a 20-year, $750,000 policy for approximately $40 per month. You can add riders to customize your coverage, but the standard term life insurance policy doesn’t come with any additional features.
Most term life policies are level term life insurance, meaning your premiums and death benefit remain the same for the life of the policy. However, there are a few different types of term life insurance, including:
A no medical exam policy is a good fit for healthy people who want to skip the medical exam, and group life insurance, which is usually paid for in part or in whole by your employer, supplements your personal policy. Other variations of term life insurance tend to offer less potential benefit for the cost of the policy, so we only recommend them under specific circumstances.
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Permanent life insurance doesn’t expire as long as you don’t miss any premium payments and comes with a savings-like component called the cash value. Because of the lifetime coverage and cash value, permanent policies are significantly more expensive than term policies. The high premiums are generally difficult to maintain over several decades, and many policies lapse due to nonpayment.
There are several types of permanent life insurance, including:
Whole life insurance is the most common type of permanent insurance and is five to 15 times more expensive than term life. Whole, variable, and universal life insurance each grow the cash value in different ways. Which is best for you will depend on your risk tolerance, as well as how you plan to pay your policy’s premiums. Final expense insurance is best for older or less healthy people who might not qualify for a traditional policy or those who need death benefits lower than $50,000.
A financial advisor or independent insurance agent can help you determine which policy is a fit for your financial goals.
The table below compares sample monthly premiums for a 20-year term policy, a whole life policy, and two final expense policies for a 50-year old male. Premiums for universal, variable, and variable universal life policies depend on your policy terms, as well as fluctuations in your cash value.
|POLICY||DEATH BENEFIT||MONTHLY PREMIUM|
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What type of life insurance you should buy depends on your financial plans. It’s most likely your needs will only require a term life policy, but there are some situations when a permanent policy is a better fit.
You should buy term life insurance if you:
Want the most affordable type of life insurance
Will retire with enough savings to self-insure
Don’t plan to financially support adult children
Will be able to fund your own funeral
You should buy permanent life insurance if you:
Have lifelong dependents, like children with special needs
Plan to use the death benefit to pay estate taxes
Are investing in life insurance for retirement
Need funds for final expenses but aren't eligible for traditional coverage
If you’ll still have financial obligations when your term policy expires, you can convert it into a permanent policy with a term conversion rider. If you do so, you’ll need to activate the rider before your policy expires in order to avoid any coverage gaps.
The choice between term and permanent insurance depends largely on your long-term financial needs. If you plan to self-insure, term life insurance will give you affordable coverage for only as long as you need it. Permanent life insurance is best for those with complicated financial assets or who will have dependents into old age, and the type of permanent life insurance that suits you will depend on your appetite for investment risk.
Term life insurance expires after a set period, whereas permanent life insurance coverage lasts for life. Permanent insurance also comes with a cash value savings component and is costlier than term life insurance.
Permanent life insurance isn’t a valuable investment for most people because return rates are lower than standalone investment accounts and premiums are high.
Permanent life insurance is best for people who have lifelong financial obligations or a high net worth. The majority of people find term life insurance better suited for their financial plans and significantly more affordable.
Amanda Shih is a life insurance editor at Policygenius in New York City. She has a passion for making complex topics relatable and understandable, and has been writing about insurance since 2017 with specialities in life insurance cost and policy types. She's previously written for Jetty and LegalZoom.