Term vs. permanent life insurance, honestly

People argue about term vs. whole life insurance as if one side must be right. The truth is less exciting. Each type solves a different problem. Each one asks you to give up something. The right choice depends on what you need the coverage to do and for how long.

We sell both. Here is how we explain the difference.

Two definitions

Term life insurance covers you for a set number of years, such as 10, 20 or 30. If you die during that term, the policy pays a death benefit, the amount paid to the people you name. If you outlive the term, coverage ends and nothing is paid.

Permanent life insurance is meant to last for your whole life, as long as the policy stays in force. Whole life and universal life are common kinds. Most permanent policies also build cash value, a value inside the policy that grows over time and that you may be able to borrow against or withdraw.

Term: what you give up

• Coverage that lasts. When the term ends, so does the protection. If you still need coverage then, buying new coverage at an older age usually costs more, and your health may affect whether you can get it.
• Cash value. Washington’s insurance regulator notes that term policies have no cash value. You cannot cash one out.
• Level cost forever. The NAIC (National Association of Insurance Commissioners) notes that renewal premiums for term coverage may rise. If your policy can be renewed, ask what renewal would cost and whether there is an age limit.

Term: what you get

• More coverage for the money. The NAIC says term insurance usually has lower premiums in the early years and offers the most protection per premium dollar.
• A clear match to a need with an end date. Many needs fade over time: a mortgage gets paid down, children grow up, retirement money builds. Term coverage can be sized to last just as long as the need.
• Simplicity. You pay the premium. If you die during the term, your beneficiaries are paid.

Permanent: what you give up

• A higher premium. The NAIC notes that premiums for permanent coverage tend to be higher. For the same premium, you will usually buy a smaller death benefit than you could with term.
• Flexibility to walk away cheaply. Washington’s regulator notes that cancelling early can bring penalties, and a company may charge a surrender fee on a policy with cash value. In the early years, the cash value may be much less than what you have paid in.
• Simplicity. Permanent policies have more moving parts: cash value, policy loans, and in some cases premiums you can adjust. Some types, like universal life, can lapse if too little premium goes in. Ask how the policy could lapse and what keeps it in force.
• A full death benefit if you borrow. The NAIC notes that unpaid policy loans and interest are subtracted from the death benefit. Your beneficiaries may get less than the face amount.

Permanent: what you get

• Coverage for life, as long as the policy stays in force. This matters when the need does not end, such as covering final expenses, leaving money to a child with lifelong needs, or providing money to settle an estate.
• Cash value you may be able to borrow against or withdraw, subject to the policy’s terms.
• Premiums set to last. Many whole life policies have a premium designed to stay level for life. Check how your policy works.

One thing to be clear about

Life insurance is not an investment. Washington’s regulator says this directly, and we agree. If anyone pitches a permanent policy as a way to earn high returns, ask them to show you, in the contract itself, exactly what is promised and what is only an illustration of what might happen.

Permanent coverage can be the right tool. But buy it because you need lifelong coverage, not because of projected cash value.

A note on final expense insurance

Final expense insurance is a smaller permanent policy meant to cover costs like a funeral, burial or cremation, and small leftover bills. It is often bought by people in their 50s, 60s and beyond who want something simple. The tradeoff: you are paying for lifelong coverage on a small amount, so compare the total premiums you may pay over time with the death benefit. Also ask whether the policy pays less than the full death benefit if death happens in the first years. Read those terms closely before you buy.

How to tell which one fits

Ask yourself these questions.

How long does the need last? If the need ends when the mortgage is paid or the children are grown, term is often a good fit. If the need lasts your whole life, permanent may be worth a look.

What can you comfortably pay every year, for as long as the policy runs? A policy you cannot keep paying for does your family no good. It is better to have the right amount of term coverage than too little permanent coverage you strain to afford.

Do you need a lot of coverage now? Young families often need large coverage for a set number of years. Term is usually the only way to get that much coverage for a budget that works.

Is there a lifelong need? Examples include final expenses, a child or other dependent who will always need support, or an estate plan your attorney has designed around life insurance.

Some people use both: term coverage for the years of heavy need, and a smaller permanent policy for needs that last.

Taxes, briefly

The IRS says life insurance proceeds paid because of the insured person’s death are generally not included in gross income, though interest earned on those proceeds is taxable. Cash value, loans and withdrawals have their own tax rules. Talk with a tax professional before you borrow from or cash out a policy.

Before you decide

First, figure out how much coverage you need. Our article on how much life insurance you actually need walks through the DIME method, and our needs calculator does the math for you.

Then compare options side by side. When we work with you, we start with a written fact-find, show term and permanent options with their tradeoffs in writing, and tell you how we are paid. You decide on your own time. See our life insurance page for more, or book a conversation.

Ask about the free look period, a short window after a new policy arrives when you can return it for a refund. In Washington, for example, it is 10 days. Check the length in your state and in your policy.