Term Life Insurance vs. Permanent Life Insurance: Which Is Better for You

Rather than instant gratification, selecting the right life insurance policy involves thinking about your spouse, children, or other loved ones what their needs are now and what they may be in the future. That can be a complex process as there are many different life insurance plans to choose from. 

The right type of policy (or a combination of life insurance policies) depends on your individual life situation and what life insurance premiums you can best afford. Yes, you want to protect your family’s financial well-being with an appropriate death benefit, but don’t you also want to live life while you’re here?

Financial security is usually the main thing on someone’s mind when they purchase a life insurance product. It’s important to think about how your family would handle the loss of income when you pass away and to make sure you have some type of coverage so they have financial protection. Maybe you have an outstanding loan or mortgage payments, or you’d like to send your child to college. Of course, there will also be end-of-life expenses. It is a lot to consider, and it can put a lot of pressure on someone, making it hard to compare life insurance options.

There are many other ways to benefit from life insurance coverage outside the death benefit that will be paid when the time comes. College tuition, burial expenses, child care, and many other things may need to be taken care of. However, you can get additional benefits out of some types of policies. Depending on your policy type, you could have a cash value component that allows you to borrow against it, you could have living benefits that allow you to access some of the death benefits if you suffer a loss of income from certain medical conditions, and there are some with an investment component, providing you with investment gains when the market does well.

Basic protection from cheap life insurance is great and sometimes necessary based on your financial situation. However, you should consider and compare different types of coverage and policy features so you can reap the benefits of life insurance throughout your entire life.

While your best bet is to talk with a qualified, trustworthy agent about your options, here are some basic pros and cons to help you wrap your head around the features and key differences in three primary types of life insurance — term life insurance, universal life insurance, and whole life insurance.

What are the pros and cons of term life insurance?

Term life insurance provides a death benefit for a specific number of years (a “term”). Most commonly, policies cover 10, 15, 20, 25, and 30 years, but you can even apply for one- or five-year terms. The shorter the term, the lower the premium payment will be. (For more information, read our “How To Find a Lower Term Life Insurance Premium“).

Pros:

• Term policies are affordable. They have lower premiums than whole and universal life policies.
• Many life insurance companies offer level term policies — with level premiums, your life insurance rates will never change during the term.
• Term policies are flexible. You can choose a term to meet your family’s financial needs through a specific period of time, like until your house is paid off, or your child’s college tuition is paid in full. (For more information, read our “Is Tuition Insurance Worth It?“).
• Many term insurance policies are convertible. Within a certain amount of time, you can opt to change them to a permanent policy, which would provide lifelong coverage.

Cons:

• Term policies expire (if you don’t convert them to permanent). Therefore, you need to apply for a new policy if you’re still living when your policy ends. As with all types of insurance, the older you are, the higher your premiums. So when you apply for a new policy after your expired one runs out, a new policy for the same term length will cost you more than you paid for the first term policy.

Tip — Look into getting a longer-term insurance policy from the start so your premium is locked in and your coverage lasts until you’re considerably older.

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What are the pros and cons of universal life insurance?

One of the two types of “permanent” life insurance, universal life, is sometimes guaranteed (will not fluctuate), but most of the time it has flexible premiums, death benefits, etc.

Pros:

• You can structure a universal life policy to last up to age 121, which would offer lifelong protection for most people.
• Universal life has a “cash value” providing the option to take out a policy loan, allowing you to use money from your cash value account while you’re still alive.
• Universal life policies offer tax-deferred cash value growth.
• Universal life offers flexibility in the frequency of life policy premiums. You could select monthly or annual premiums, for instance.

Cons:

• Interest rates affect the performance of universal life policies. That affects the amount of the premium you pay and the cash value amount of your policy.
• Premiums can be too costly for young families and others without a lot of income to spare.

Tip — Universal life policies can be especially useful for estate planning purposes in situations where you’re expecting a significant amount in estate taxes due at death.

What are the pros and cons of whole life insurance?

Another permanent policy, whole life is similar to universal, but it has guarantees of premium, interest rate, death benefit, and more.

Pros:

• You can structure a whole life policy to last up to age 121; they offer lifelong coverage.
• Whole life is a cash value life policy, allowing you to borrow against it.
• Whole life policies offer tax-deferred growth.

Cons:

• Young families and others without extra income beyond their living expenses may not be able to afford whole life insurance.

Tip — Whole life policies serve estate planning purposes well (particularly in situations where a large estate tax is expected at death).

What type of life insurance should you choose?

Decisions, decisions! How can you see to the secure future of your loved ones without sacrificing quality of life now? Going gourmet with universal or whole may sound tasty, but will the higher premiums set you back in the long run?

Here’s some food for thought: Maybe a better bet would be to buy an affordable term life policy now and save separately on the side using the difference from what you would have paid on a permanent policy. You can get a term life insurance quote quickly and conveniently online to gauge the cost.

Again, the right type of policy for each individual depends on many different factors. Don’t rush into a decision. Talk with a life insurance expert and review all the options thoroughly before making a decision.

Read more:

• What is level-term life insurance?
• How long should life insurance coverage last?

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Case Studies: Exploring Life Insurance Options

Case Study 1: John’s Term Life Insurance

John, a 35-year-old married individual with two young children, wanted to ensure financial security for his family in case of his untimely demise. After considering his current needs and future obligations, he decided to purchase a 20-year term life insurance policy.

The policy provided a substantial death benefit that would cover his family’s expenses, including mortgage payments and his children’s education. John appreciated the affordable premiums and the peace of mind it gave him knowing that his loved ones would be taken care of if something were to happen to him.

Case Study 2: Sarah’s Universal Life Insurance

Sarah, a 45-year-old business owner, wanted a life insurance policy that offered flexibility and the potential for cash value growth. She opted for a universal life insurance policy with adjustable premiums and death benefits. This type of policy allowed her to modify her coverage as her financial situation changed over time.

Additionally, Sarah appreciated the cash value component of the policy, which provided her with the option to borrow against it if needed. As an entrepreneur, she saw the value in having a life insurance policy that could adapt to her evolving needs.

Case Study 3: Mark’s Whole Life Insurance

Mark, a 50-year-old individual, wanted a life insurance policy that would provide lifelong coverage and guaranteed benefits. He chose a whole life insurance policy that offered a fixed premium, a guaranteed death benefit, and the potential for cash value accumulation.

Mark saw this policy as a way to protect his family’s financial future while also serving as an estate planning tool. He knew that the higher premiums compared to term life insurance were worth the lifelong coverage and the stability it provided.

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