Term vs. permanent life insurance: Which is right for you?

Quick answer: Term life insurance covers you for a set period and often costs less. Permanent life insurance can provide lifetime coverage and may build cash value, though it typically costs more. Your choice depends on how long you need coverage, what you can afford, and whether you want cash value.

Buying a life insurance policy can help you feel more confident that your loved ones will be protected when you die, but it’s not always a straightforward decision. You’ll want to consider several factors when choosing a policy, including how much coverage you need and how long you’ll need it.

Understanding the different types of life insurance and what makes each one unique can make the decision easier.

Term vs. permanent life insurance: What’s the difference?

The main differences are how long coverage lasts and how much it costs. Term life insurance covers you for a set period, such as 10, 20, or 30 years, and it often costs less. Permanent life can last your whole life and may build cash value that you can borrow or withdraw against, but it typically costs more.

Key differences to know

• Coverage length. Term insurance lasts for a set time. Permanent insurance can last your whole life if you meet the policy’s requirements.
• Cost. Term insurance usually costs less. Permanent insurance often costs more because it’s designed to last longer and may build cash value.
• Cash value. Term policies usually don’t build cash value. Some permanent policies build value over time.  Depending on the policy, you may be able to access cash value by withdrawing your basis and then take out loans.  If the loan is not paid back, the death benefit will be reduced and can raise the risk that the policy will lapse..
• Premiums. Term premiums are often fixed during the initial term. Permanent premiums may be fixed or flexible, depending on the policy.
• Investment choices. Some permanent policies earn interest. Others may be linked to a market index or offer investment options.
• Flexibility. Term insurance is usually less flexible. Some permanent policies may let you change your premiums or death benefit within set limits.

When is term life insurance a good option?

Term life insurance tends to fit best when your main goal is coverage for a specific time period. It's often a lower-cost way to buy a higher death benefit while your financial obligations are at their peak.

Term life insurance may make sense if you want:

• ·Income protection during your working years. A term policy can help replace income if your family depends on your paycheck.
• ·Coverage for a debt. You may want coverage until a mortgage or other major debt is paid off.
• ·Business protection for a set period. Business owners may use term insurance to cover a key person during an important stage.
• ·Simple, lower-cost coverage. Term insurance may work if you want basic coverage while saving and investing in other ways.

When choosing a term length, consider:

• How much debt you have and when you expect to pay it off
• The number and ages of your dependents
• Anticipated future expenses, including end-of-life costs
• How long your family may depend on your income

For example, a 28-year-old parent with young children and a 30-year mortgage might choose a 30-year term. A 45-year-old parent with teenage children and 10 years or less left on their mortgage may choose a 10-year term.

When is permanent life insurance a good option?

Permanent life insurance tends to fit best when you have long-term needs that don’t end on a timeline, or when you want a policy that can build cash value over time.

Permanent life insurance may make sense if you want:

• Lifetime coverage. Unlike term policies, permanent coverage doesn't end after a set term. As long as the policy stays active, coverage continues.
• Liquidity for estate needs. If estate taxes are a concern, permanent life insurance can help replace the proceeds from the estate that would be lost to taxes, so your heirs still receive the inheritance you intended.
• Business planning support. Some business owners use life insurance to fund a buy-sell agreement.
• Long-term care options. Some policies offer riders that may let you use part of the death benefit for qualifying long-term care costs. Rider availability, cost, and rules vary by policy.
• Long-term support for a dependent. If you have children or other dependents who may not be able to support themselves financially, permanent coverage can be one way to plan for that need.
• Cash value. Some permanent policies build value over time. Depending on the policy, you may be able to borrow from it or use it to help pay premiums, though loans and withdrawals reduce the death benefit and can raise the risk that the policy will lapse.

Because permanent policies can last longer and may include cash value features, they often cost more than comparable term coverage.

What are the types of permanent life insurance?

Permanent life insurance falls into two main categories: whole life and universal life. Both types of life insurance may build cash value, but they differ in how premiums work, how cash value grows, and how much flexibility you have.

Whole life insurance

Whole life insurance is generally one of the more predictable types of permanent insurance. Premiums are often fixed for the life of the policy, and the insurer sets the cash value growth rate, subject to any guarantees in the contract. Guarantees are backed by the issuing insurance company's claims-paying ability.

Key features include:

• You typically don't choose investments inside the policy. The insurer manages the cash value.
• Cash value growth may be more stable than it is with market-based policies. It may also be lower.
• Some whole life policies may pay dividends. Dividends aren’t guaranteed.
• You may be able to use dividends to lower premiums, buy more coverage, or add to cash value.
• Loans and withdrawals can reduce the death benefit. They may also raise the risk that the policy will lapse.

Universal life insurance

Universal life insurance can offer more flexibility than whole life. Depending on the type, you may be able to adjust premiums and death benefits within limits set by the contract. These policies often require regular review, since changes in interest rates, policy costs, or premium payments can affect how long coverage lasts.

The main types of universal life insurance differ in how they credit interest or invest cash value.

Current assumption universal life insurance

With current assumption universal life insurance, the insurer sets the interest rate, usually with a minimum guaranteed rate. The insurer can change the current rate based on market conditions.

Your coverage generally stays active as long as the policy has enough value to cover its costs. Y If interest rates fall or earlier premiums were too low, you may need to pay more to keep the policy from lapsing.

Indexed universal life insurance

With indexed universal life insurance, credited interest is linked to a market index, such as the Nasdaq 100 or the S&P 500. The policy doesn’t invest directly in the index. Instead, the insurer uses a formula to decide how much interest to credit. Unlike variable universal life, indexed universal life doesn't put your cash value directly into securities.

• A floor: This may limit negative credited interest. The floor is often 0%.
• A cap: This limits how much interest the policy can earn.
• A participation rate: This controls how much of an index gain is used to calculate interest.
• A spread: This is an amount the insurer may subtract when calculating interest.

Even with a floor, indexed universal life insurance can still carry costs and limits that affect results. Policy rules vary, and performance isn't the same as investing directly in an index. It's worth reviewing how caps, spreads, and participation rates work before you buy a policy.

Variable universal life insurance

Variable universal life insurance lets you choose investments from a set of subaccounts, which often work like mutual funds. Unlike indexed universal life, variable universal life invests your cash value directly, so performance can mirror market gains and losses more closely. This can offer more growth potential but also creates more risk.

Key features include:

• Cash value can go up or down based on market performance.
• Poor investment results and policy costs can reduce cash value.
• Low cash value can raise the risk that the policy will lapse.
• You'll want to review fees, investment options, and how much hands-on management you're comfortable with.

Variable universal life is a securities product and is subject to additional regulatory requirements, including a prospectus you should read carefully before investing.

Frequently asked questions

Can you convert term life insurance into permanent life insurance?

Many term policies include a conversion option that lets you switch to a permanent policy without a new medical exam, but only within a set window. This can be useful if your health changes or your financial needs evolve. Check your policy for the exact rules and deadlines.

What happens if you outlive a term life insurance policy?

If you outlive your term, coverage ends and there’s no payout. Depending on the policy, you may be able to renew the coverage at a higher cost, convert it to permanent coverage, or apply for a new policy. Some policies include a return-of-premium rider, which may return some or all of the premiums you paid if you outlive the term. This type of rider typically raises the cost.

How much life insurance coverage do you need?

The amount of life insurance you need depends on the income you want to replace, your debts, future expenses, existing assets, and how long others may depend on you. An income multiple can give you a rough estimate, but a financial advisor can help you build a more personalized estimate.

Can life insurance part of a retirement or estate plan?

Yes, permanent life insurance may support estate planning, legacy goals, or the need for cash after a death. Term coverage can fill an income gap during working years while other assets build toward retirement. The role of life insurance depends on your goals, timeline, and overall financial plan.

Is term or permanent life insurance better for a young family?

Many young families lean toward term life insurance because it offers a larger death benefit at a lower cost during years when income replacement and debt coverage, like a mortgage, matter most. As your needs evolve, a conversion option or a supplemental permanent policy can add long-term coverage.

Can you own both term and permanent life insurance at the same time?

Yes. Many people combine term and permanent coverage, sometimes called "laddering," to match different needs. For example, you might carry a permanent policy for lifelong needs, like estate planning, alongside a term policy that covers a mortgage or your working years.

Is the cash value in a permanent life insurance policy taxable?

Cash value generally grows tax-deferred, and policy loans typically aren't taxed as income as long as the policy stays active. However, withdrawals above what you've paid in premiums, or a lapsed policy with an outstanding loan, can trigger taxes. Talk with a tax professional about how these rules may apply to your situation.

Choosing the life insurance that’s right for you

Life insurance works best when it fits into your broader financial picture. If you're balancing retirement goals, college funding, and long-term family needs, it can help to talk with a financial advisor about tradeoffs, costs, and how long you need coverage.

Learn more about the role life insurance can play in your financial plan.