Term vs. Permanent Life Insurance: What’s the Difference & Which One Should You Get?

Life insurance policies comprise two primary types: Term life and permanent life insurance. Term life insurance offers temporary coverage, is valid for a specific time frame and does not accrue cash value. Permanent life insurance remains active for a lifetime and may feature a cash value component.

Advertising & Editorial Disclosure
Last Updated: 11/17/2022
Edited By     |  
Written By     |  

There are several differences between term vs. permanent life insurance, including coverage duration, cash value and premiums.

Traditionally, term life insurance is the more affordable option, but the premiums may increase at renewal. Permanent life insurance has higher costs initially, but they stay level for the duration of the policy.

While most people prefer term-life insurance, some situations may warrant permanent life insurance, such as parents taking care of a lifelong dependent or seniors intending to use the cash value component as supplementary income later in life.

Table of Contents
Insurance Rates

Compare Life Insurance Rates

Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.

widget-location-pin

What Is the Difference Between Term and Permanent Life Insurance?

If you need short-term coverage, a term life insurance policy may be better than permanent life insurance. You will need to choose a term length for your needs and decide whether to renew the policy after it expires. Term life insurance is more affordable initially, but premiums my increase after renewal.

Permanent life insurance is costlier, but offers coverage for a lifetime and does not require renewal. Policyholders make standard payments for the duration of the policy. Unlike term life insurance, permanent coverage comes with a cash value component.

Term vs. Whole Life Insurance

Term Life Insurance
  • Cheaper compared to permanent life insurance.
  • Policyholders can tailor the duration of coverage based on their life situations.
  • Premiums change upon renewal.
  • No cash value growth opportunities.
  • Possible conversion privilege to permanent life insurance.
Permanent Life Insurance
  • Policyholders pay higher premiums than term life insurance.
  • Policies last a lifetime and do not require renewal.
  • Standard premium amounts, which do not change during the policy’s lifetime.
  • Offers cash value growth opportunities.
  • No option to convert to term life insurance.

Although both term life and permanent life insurance policies aim to secure the financial future of your loved ones should you die unexpectedly, these two policy types differ significantly.

A term vs. permanent life insurance comparison shows that term life policies are ideal if you need affordable short-term coverage. Permanent life insurance is more suitable if you are looking for long-term coverage with cash-value benefits.

  • Feature
    Permanent Life Insurance
    Term Life Insurance
  • Length of Coverage

    Permanent life insurance policies
    last a lifetime as long as your
    continue to make your premium
    payments. That means the coverage
    does not have a specific duration
    and does not need renewal.

    Term life insurance policies span a
    specific period. According to the
    Insurance Information Institute,
    these policies may last as little
    as one year, although common policy
    lengths are five to thirty years.
    Coverage expires as soon as the
    term ends.

    A term life policy does not bear
    any cash valuer.

  • Cash value

    Permanent life insurance premiums
    cover the cost of insurance and
    policy fees. They also contribute
    to a cash value component, which
    you can withdraw as a loan or use
    to offset premiums.

    With term life insurance policies,
    your loved ones do not receive
    benefits if the policyholder
    outlives the policy.

    Note that level-term life insurance
    policies feature a standard death
    benefit for the duration of the
    policy, but decreasing-term
    policies reduce the benefit amount
    over the policy life.

  • Death Benefit

    Permanent life insurance policy
    beneficiaries receive a death
    benefit once the policyholder dies,
    if they have paid their premiums on
    time and in full.

    Term life insurance policies are
    cheaper initially. However, policy
    costs increase with an increase in
    the policyholder’s age at renewal.

  • Premium Over Time

    Premium amounts are typically
    higher than term life insurance but
    do not change for the duration of
    the policy.

    However, exceptions may apply to
    the premium for some types of
    permanent life insurance. For
    instance, universal life insurance
    allows you to change your premium
    amount based on the cash value
    component.

    With whole life insurance, your
    premiums remain constant regardless of
    your health condition or age.

    Term life insurance does not
    feature any investment or savings
    plan. As such, no dividends are
    available to policyholders.

  • Dividend Eligibility

    Some permanent life insurance
    providers pay regular dividends to
    policyholders, although this may be
    guaranteed or non-guaranteed.

    The dividend amount varies based on
    the premium and the company’s
    financial performance.

    Policies with term life insurance
    coverage do not accrue any cash
    value, and you cannot withdraw or
    borrow from the policy.

  • Borrow or Withdraw
    Cash Value

    With a permanent life insurance
    policy, you can access the cash
    value as a loan or as a partial
    cash surrender.

    Policyholders can purchase various
    term insurance riders, including
    death benefit, guaranteed
    insurability, cost of living,
    premium waiver and spouse benefit
    riders.

  • Rider Eligibility

    Several term insurance rider
    options are available to permanent
    life insurance policyholders. These
    include accelerated death,
    accidental death, guaranteed
    insurability, long-term care and
    family income benefit riders.

    Aside from leaving the death
    benefit of your policy to a
    beneficiary to cover any expenses,
    you can select a return of premium
    term life insurance policy to
    qualify for a refund of your
    premiums at the end of the policy
    if you are alive when it expires.

  • Use for Estate
    Planning

    Ideal for long-term planning,
    including estate planning. The cash
    value component can serve as
    retirement income or cover
    long-term care, disability and
    business succession costs.

Cost of Term Life Insurance vs. Permanent Life Insurance

On average, the cost of permanent vs. term life insurance may vary significantly, with permanent life insurance costing up to 20X more than a term life insurance policy. MoneyGeek compared life insurance rates across various demographics including age, location and coverage amount. You can use the following infographic to compare monthly premiums for term and permanent life insurance policies.

Average Monthly Premium of Term Life Insurance Vs. Permanent Life Insurance

coins
Term Life Insurance

Monthly Cost

$27
money
Permanent Life Insurance

Monthly Cost

$511
Permanent life insurance policies cost on average:$484 more

This is 1793% more expensive.

Although permanent life insurance seems appealing to many consumers due to the extended coverage and cash value component, term life insurance is attractive because it costs less and may offer higher benefits, despite offering short-term protection.

Parents seeking to protect their children financially may not need permanent life insurance because their dependents will eventually become independent.

Should You Get Term or Permanent Life Insurance?

The best option when you’re considering term life insurance vs. permanent life insurance depends on your overall financial health and goals.

Generally, term life insurance policies suit spouses or parents who wish to safeguard their children’s education or cover mortgage payments in case they die before those obligations are met.

Permanent life insurance may suit individuals seeking lifetime coverage and interested in retirement savings. Policyholders can build the savings component by making higher payments. They can later invest, withdraw or borrow against the cash value.

  • This is an icon

    Term life insurance is best for…

    • Spouses and parents interested in securing their children’s education and other financial obligations until they become independent.
    • Safeguarding your family assets.
    • Customized policy terms.
  • This is an icon

    Permanent life insurance is best for…

    • Individuals with lifelong dependents.
    • People who need a retirement savings plan in addition to insurance coverage.
    • Those interested in alleviating estate taxes for their beneficiaries.

Term vs. Permanent Life Insurance for Seniors

Term life insurance offers better coverage per premium dollar, although the rates generally increase at each renewal cycle and are more expensive with advanced age.

While the opposite is true for permanent life insurance, some may find this option ideal due to the fact that it does not require renewal. Although many people benefit from the cash value component, this amount usually remains with the insurer upon death.

You can use the following table to compare the benefits of various life insurance policies for senior buyers.

  • Policy Type
    Description
  • Term Life Insurance
    Term life insurance meets the coverage requirements of everyone, including seniors in need of affordable protection. Senior buyers may use term life insurance to protect short-term financial obligations like mortgages or other loans. However, better policies may be available for those looking for an option that includes final expenses.
  • Simplified Issue Life Insurance
    Seniors can take advantage of the simplified issue life insurance policy’s medical examination waiver to secure coverage within a few days. While this type of insurance offers lower death benefit amounts, it offers final expense coverage and there may be funds remaining for beneficiaries.
  • Guaranteed Acceptance Life Insurance
    Guaranteed acceptance or guaranteed issue life insurance suits seniors because they do not need a medical exam and don’t have to fill out a health-related questionnaire. The policies cost more for less coverage than standard life insurance policies.
  • Final Expense Life Insurance
    Final expense life insurance offers coverage for seniors. While it is similar to permanent life insurance, final expense coverage features lower premiums and reduced death benefits. It covers funeral costs, including cremation, embalming, casket costs and memorial services.
tip icon
MONEYGEEK EXPERT TIP

Insurance companies charge higher premiums for senior policyholders since they are less likely to outlive their policy. If you do not have any dependents, you may consider making an alternative investment since life insurance may no longer be a priority. Alternatively, you may consider cheaper life insurance options like final expense coverage.

If you are sure that life insurance is the best bet for your needs, consider consulting a financial advisor for detailed guidance. MoneyGeek’s analysis of the best term and permanent life insurance for seniors can help you choose the most suitable plan type for your situation.

Why Term Life Insurance Is Better in Most Cases

Term life insurance is better than permanent life — in spite of the lack of cash value — for most people, who can invest additional funds in alternative saving vehicles. Permanent life insurance may be preferable in rare situations, and its cost can be significantly higher.

The following table highlights why term life insurance may be more advantageous than permanent coverage.

  • This is an icon

    You can select a suitable term length

    Term life policies allow you to choose a duration that suits your needs. You can then renew your policy after the term ends if you still need it. For instance, you can renew a policy for the duration of your mortgage and end the coverage as soon as you complete the payments.

  • This is an icon

    Your beneficiaries will eventually become independent

    Eventually, your dependents may grow up and attain their own financial freedom. If you get a permanent life insurance policy, it may become irrelevant as soon as your children or other dependents become financially independent. Permanent insurance may be worth considering if you have a lifelong dependent.

  • This is an icon

    You will only pay a fraction of permanent life insurance costs

    According to research, term life insurance costs approximately 20X less than permanent life insurance for the same death benefit. That means you can get term insurance and invest the difference elsewhere to increase your returns.

  • This is an icon

    You can tie your policy to specific needs

    With term life insurance, you have the flexibility of covering specific situations of your life. For instance, you can use the policy primarily to pay for your children’s education, or business succession after your death. This flexibility ensures that your beneficiaries use the funds to cover priority expenses, eliminating unnecessary coverage.

tip icon
MONEYGEEK EXPERT TIP

MoneyGeek reviewed the top term life insurance providers across factors such as age, premium amount and service quality so you can find the best company for your needs.

While term life coverage may have advantages over permanent life insurance for you, you can weigh your interests and financial needs against both options to determine the best offer.

You may need to consider permanent life insurance vs. term insurance in the following circumstances:

  • You have a lifelong dependent — Having a disabled or other lifelong dependent means you may need to ensure they get adequate financial support once you die. Permanent life insurance may help cover this gap.
  • You need a tax-free Investment — Permanent life insurance consists of a cash value component you can leverage for retirement savings. Aside from the cash value, you may also receive dividends that could be helpful over the life of the policy.
  • You need long-term care — Permanent life policies feature an optional long-term care rider that allows you to receive your death benefit to cover long-term care costs while you are still alive.
  • You need to cover a business succession — You may purchase a policy for another person, including a spouse or business partner. The benefits act as alternative income if the other person dies unexpectedly.
  • For estate planning — A permanent life insurance policy can help shield your estate’s net value from tax costs since your death benefit can help offset the tax amounts.

Permanent life insurance policies include different types. You can use MoneyGeek’s review of the best whole life and best universal life insurance providers to compare options.

Insurance Rates

Compare Life Insurance Rates

Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.

widget-location-pin

Frequently Asked Questions

The choice between term and permanent life insurance policies depends on your needs. MoneyGeek responded to the following questions to help you understand the difference between the two policy types.

About the Author


expert-profile

Mark Fitzpatrick is a senior content manager with MoneyGeek specializing in insurance. Mark has years of experience analyzing the insurance market and creating original research and content. He graduated from Boston College with a Bachelor of Arts and Johns Hopkins University with a Master of Arts.


sources