Term or Permanent Life Insurance?

Term vs. Permanent Life Insurance: At a Glance

The debate over term versus permanent life insurance has been around for ages. In reality, it doesn’t have to be an “either-or” decision. Neither type of coverage is categorically better than the other—it depends on the policyholder’s unique needs, goals, and financial circumstances.

How Term and Permanent Policies Work

When Term Life Insurance Makes Sense

Term life covers you for a specified time—often 10, 15, 20, or 30 years. Most term policies involve some form of underwriting that typically requires a health exam. Because premiums are generally lower than permanent policies, many people opt for term life when they only need coverage for a finite period. Once the term expires, you can typically renew the coverage, but your new premium will reflect your older age and possibly higher risk.

• Provides a guaranteed death benefit but has no cash value accumulation
• Premiums are usually fixed during the term
• After the coverage period, costs can go up significantly
• If you stop making premium payments, the coverage ends

If you suspect that you might later want permanent coverage, you could explore term life with a “conversion privilege,” which allows you to convert to permanent life without requalifying for coverage medically. However, specific terms and conditions vary.

When Permanent Life Insurance Is Appropriate

Permanent life insurance lasts your entire lifetime as long as you maintain your premiums. This category includes whole life, universal life, indexed universal life, and variable life insurance. While premiums are generally higher than those for term coverage—especially at first—the policy never expires (assuming consistent payment).

Another distinction is that permanent life policies feature a “cash value” component, also called the surrender value. This accumulates over time, and you can use it in several ways:

• Take partial withdrawals
• Borrow against it (policy loans)
• Fully surrender the policy in exchange for the cash value
• Eventually use the cash value to pay premiums

Withdrawals and loans typically reduce the death benefit if left unpaid, but they may also receive favorable tax treatment under IRS rules. This could provide options like funding retirement income or covering unexpected major expenses.

How Does the Cash Value Grow?

• Whole Life: Grows at a guaranteed interest rate
• Universal Life: Grows based on current interest assumptions, which can vary
• Indexed Universal Life: Ties growth to index performance (e.g., the S&P 500), while protecting against direct losses
• Variable Universal Life: Allocates premiums into investment subaccounts, so performance depends on underlying market results

Matching Coverage Type to Your Goals

Where Term Life Insurance Fits

• Replacing a breadwinner’s income during peak working years
• Providing a financial safety net for immediate expenses if an earner passes away
• Handling major or escalating costs, such as a growing family or special care needs
• Offering supplementary coverage alongside a permanent policy when a larger payout might be needed

When Permanent Coverage Is a Stronger Fit

Structured properly, a permanent policy can serve various objectives, including:

• Building an additional tax-deferred “bucket” for retirement savings
• Generating tax-friendly retirement income
• Funding large educational expenses
• Paying off mortgages or other significant debts at a key moment
• Amassing emergency funds for unexpected opportunities or crises

Life Insurance for Estate Planning and Liquidity

Life insurance can also play a part in estate planning. Taxes and settlement costs might reduce the net value of an estate, and an insurance payout can provide quick liquidity to cover expenses or support beneficiaries. While permanent life insurance offers many benefits, it’s not a must-have for everyone, just as term coverage might not fit all situations.

Life Insurance: Frequently Asked Questions

• Can I have both term and permanent insurance? Yes. Many families use term for larger, temporary needs and permanent for lifelong protection.
• What is a “conversion privilege”? It lets you switch from term to permanent without new health underwriting, if your policy allows.
• Does permanent life insurance always build cash value? Yes, but how quickly it grows depends on the policy type and structure.
• What happens if I surrender a permanent policy? You receive the accumulated cash value (minus any loans or surrender charges), but coverage ends.
• Which type is right for my needs? It depends on your coverage goals, budget, and how long you want protection. Carefully consider how your financial responsibilities might evolve over time.

Ultimately, the right choice depends on your goals, timelines, and financial resources. Policy rates are crucial, but insurance decisions should include broader considerations than cost alone. Striking the right balance means matching coverage type with your individual needs, ensuring your insurance strategy supports your overall financial plan.