Term Life vs Permanent Life Insurance

By Jordan Fabel •  Updated: November 14, 2022  •  6 min read  •  Financial
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When you’re considering life insurance, there are a few different types. Term life and permanent life insurance are two of the most common options. While these are both life insurance, they are different.

Before you make your final decision, it’s a good idea to understand what each option offers. Let’s look at each individually, and the differences between term life and permanent life insurance.

What is Term Life Insurance?

A term life insurance policy will expire after a specific number of years. Usually, these plans last for 10, 20, or 30 years. With this type of plan, you get to choose your death benefit, along with the coverage length.

Investopedia.com defines term life insurance as “a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term.” It may also be called pure life insurance. However, once the term expires, you will either have to renew the policy or convert it to permanent coverage.

What is Permanent Life Insurance?

NerdWallet.com defines permanent life insurance as “insurance that covers you for the rest of your life and pays out regardless of when you die, as long as you’ve paid your premiums.” It will come with a savings account, too. This is known as the cash value component.

You can actually borrow money against or withdraw money from the cash value component if you want. It may be possible to adjust your premium payments and the amount of coverage as you need.

Often, this type of insurance is called whole life insurance, which has a fixed premium. It may also come in other forms known as universal life insurance and variable life insurance.

Term Life vs Permanent Life Insurance: The Key Differences

When looking at term life vs permanent life insurance, there are some key differences. You want to look at the policy duration and the cash value component. It’s also important to look at a few other things.

Premium Cost

Typically, term life insurance offers a lower premium compared to permanent life insurance. It will have an expiration date, however. You will likely pay less for term life insurance compared to permanent life insurance due to the term of the coverage.

Policy Expiration

Permanent life insurance is good as long as you pay the premiums. With term life insurance, it has a specific term of coverage. Often, you will choose a 10-, 20-, or 30-year coverage term with this type of life insurance.

Cash Value Component

When you choose term life insurance, it has no cash value component. You won’t be able to borrow against it or take out cash at any point. Permanent life insurance comes with this feature. You can use that cash value component to your advantage in an emergency.

Pros & Cons of Term Life Insurance



Pros & Cons of Permanent Life Insurance



Term Life vs Permanent Life Insurance: Which is Right for You?

There is no right or wrong answer with these two types of life insurance. They are both different and fit different situations.

If you’re looking for a lower premium, you will likely choose term life insurance. It’s often five to ten times lower than a permanent life insurance policy. When your monthly budget is already tight, term life insurance is likely the best choice.

However, if you’re looking for more permanent coverage, you want permanent life insurance. You just keep up with your payments and you’re covered.

Those seeking a savings or investment vehicle will also want permanent life insurance. You will get a cash value component, which can grow over time.

While term life insurance is often cheaper, if you’re younger, you might be able to get a very good rate on permanent life insurance.

Average Cost Comparison for Term Life vs Permanent Life Insurance

The best way to see the difference in life insurance premiums is to look at a reliable source. LifeInsurance.org shows the rates for a 30-year-old male and 30-year-old female with a 20-year term life policy and a permanent life policy at $250K in benefits.

The Term life policy came in at $156 per month for the male and $141 per month for the female. The permanent life insurance came in at $2,385 for the male and $2,114 for the female per month.

It’s pretty clear the differences in the premium amount. However, the term life is money you will never see again unless death benefits are paid out to a beneficiary. Permanent life insurance has a cash value component.

Who is Each Type of Life Insurance For?

The most common time a term life insurance policy is used is when it’s needed temporarily. For example, if you just took out a 20-year mortgage, you may also take out a 20-year term life insurance to protect your family financially. Then, when the mortgage is paid off, you won’t have the same need for the term life insurance policy.

The person choosing the permanent life insurance policy wants to build cash value. They may want to build equity in the policy over time and use it as a way to fund retirement in the future.

When you’re shopping for life insurance, there is no wrong or right answer. There are just different types of insurance that fit different types of situations. Many choose term life insurance to have some benefits while keeping the monthly payment lower. However, others choose permanent life insurance to have a built-in type of savings.

Jordan Fabel

Jordan Fabel

Covering different 'paths' that people's lives can take. Creative, foster parent, ticket dismissal, you get the idea. Exploring the requirements, certifications, exams, and obviously, approved courses along each path.