Term vs. permanent life insurance

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.

Term vs. permanent life insurance: Quick comparison

What is term life insurance?

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:

• No medical exam term life insurance

• Group life insurance

• Annual renewable life insurance

• Decreasing term life insurance

• Return of premium life insurance

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.

What is permanent life insurance?

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

• Variable life insurance

• Universal life insurance

• Final expense insurance

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.

Term vs. permanent life insurance: Cost comparison

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.

→ Find out how much you could pay for term life insurance

Should you get term or permanent life insurance?

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

Converting term to permanent life insurance

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.