Life Insurance 201: Term Life vs Permanent Life

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A couple of months ago, we wrote about Life Insurance 101 and covered the basics. If you haven't already, start there and read that article to understand how life insurance works, some basic definitions, and how much coverage you need. 

Once you've determined whether you need insurance and how much you'll need, selecting the right coverage to shop for comes next. This is a crucial question, and choosing the wrong coverage or allowing someone else to steer you into the wrong product can cost you thousands and, worse yet, leave you underinsured. 

Two Main Types of Life Insurance

We can divide the life insurance world into many different kinds of policies with various benefits and characteristics, but they will all be either Term Life or a form of Permanent Life.

• Term Life
  • Term Life is insurance that provides coverage for a specific period of time. 
  • The policy buyer agrees to pay a specific premium to secure coverage for a specific amount of time. 
    • Sometimes, the premium increases a bit each year, but you can also lock in a premium for a certain number of years before it jumps up
  • Term life does not accumulate any additional value beyond the death benefit. If the insured passes away while the term life policy is "in force," the initially agreed-upon death benefit pays out, and the contract is over. 
  • Similarly, the owner of the term life insurance policy can stop paying premiums at any time and end the coverage. 
  • Because term life does not accumulate any additional value and lasts only for a specific amount of time, which the insured is usually expected to outlive, it is the least expensive way to purchase the most insurance possible. It's an insurance policy both you and the insurance company hope will never pay out.
• Permanent Life
  • Permanent Life insurance is a broad term for various types of insurance. Whole Life, Universal Life, Variable Life, Indexed Universal Life, and more are all forms of permanent life insurance. 
  • As the name implies, permanent life insurance is meant to be in place for the insured person's entire life. It does not have a time limit or "term." If the owner keeps up with premium payments, the policy will last until their death, no matter how far into the future that is. 
  • Permanent insurance also builds what is called "cash value." Think of cash value as a separate bucket where part of each premium payment you make goes. It also has the potential to earn interest or be invested for growth.  
  • This additional cash value reserve, combined with the plan's very long-term nature, means that premiums for permanent life policies can be very high relative to term life policies, potentially several times more for the same amount of coverage. 

How do you decide which type of insurance is best for you?

Once you start looking for life insurance, you will find both options readily available. You may even encounter sales pitches pushing you in one direction or another, but going into the search with some knowledge can help you see past the pitch and purchase what is right for you and your loved ones. 

Do you need a lot of insurance for cheap? Term life is probably the way to go. 

This is the camp that most people searching for insurance will fall into. A person's first need for life insurance often comes the moment someone else begins depending on at least a part of their income. This might be when a couple in a committed relationship buys a home together, when someone has children who depend on them for support when a partner takes a step back from full-time work, etc. 

People in this situation often need a lot of coverage, more than they realize. 18 or more years of bringing a kid into adulthood and through college? That's expensive. Giving a non-working or under-employed spouse the ability to pay a mortgage, put food on the table, and stay on their feet after the death of a partner? That's a lot to cover. And when you need a lot of coverage (often $1,000,000 or more) and need the cost to also fit in with raising a family, saving for retirement, and making a car payment or two, term life insurance will give you the most coverage for the easiest to swallow premium hands down, end of sentence, full stop.

In almost all scenarios, term life insurance should be the first life insurance purchase someone makes. 

Do you need insurance for a specific time period? Term Life can cover that period. 

We touched on this a little in our Insurance 101 blog. Most people do not need life insurance for their entire lives. Let me say that again: Most people don't need life insurance for their entire lives. They need it for a specific time period when their income is high relative to their assets, they have significant future expenses that that income will need to meet, and there are other individuals who would be vulnerable if that income went away. 

This describes most people during their working years. Generally speaking, people in their 20s, 30s, 40s, and 50s don't yet have enough assets to live on. They may have a mortgage and other obligations they are trying to pay down. They might have financial obligations beyond themselves, including child care and college expenses, and need to provide that life insurance safety net for others if they pass away and their income disappears. 

What happens when you get older? Ideally, as you get into your 60s and closer to retirement, your assets have caught up to your income as you prepare to retire. Your investments can generate income. Your kids are self-sufficient adults and no longer dependent on your income. Maybe your mortgage is getting close to paying off, and you have less income to protect. Social Security will soon kick in to replace a part of your income, and you no longer have financial dependents. Do you still need life insurance? At this point, for most individuals, the answer is no. Term life insurance served its purpose as a safety net "just in case" for the time period you needed it, inexpensively. Now that you're past that point, there may be no need to pay premiums, which can get quite expensive as you enter your golden years. 

What if someone IS depending on you financially, even later in life, no matter the age? Permanent Life insurance may have a place here. 

In the previous paragraph, we discussed why most individuals do not need coverage for their entire lives. It's impossible to give a specific statistic, but the vast majority of people will never need whole life or other forms of permanent life insurance, and more people own them than should. Having said that, there is a place for permanent life insurance for some people. Here are some examples of individuals who might benefit from permanent life insurance.

• Estate tax planning is a classic case where life insurance can serve a purpose. Because of its income-tax-free nature and the known value of the payout, life insurance can help a family with a big estate tax bill meet that need without having to put a firesale on other assets. 
  • Remember that the policy must be properly structured and owned to provide the right benefits. We won't get into that here, but it's not just any old policy. 
  • Also, keep in mind that as of this writing in 2025, the estate tax exemptions are just under $14,000,000 per person. That amount is subject to change, but as of now it will only affect a very small percentage of the population. 
• "Equalizing" the estate for beneficiaries might be necessary if a single illiquid asset that can not be easily split is part of an estate with multiple beneficiaries. Think of a vacation home or a family business that one beneficiary wants to keep for themselves, but the other beneficiaries have no interest in. A life insurance policy could "equalize" the estate's value, leaving the asset to one beneficiary and the insurance funds to the others. 
• A family with a special needs child is another ideal case for permanent life insurance, particularly if the special needs individual is expected to receive government support benefits their entire life. If the child is not expected to become financially independent, they will need financial support regardless of age, and life insurance policies paired with the appropriate estate planning and trusts will provide inheritance that does not impact government benefits. On the contrary, assets left directly to a beneficiary with special needs, especially retirement accounts, can cause real problems. 
• Protecting a spouse or partner who is not entitled to a survivor's pension. Let's say you're among the few workers still receiving a traditional pension. State and government employees commonly still have defined benefit pensions, and these payouts still exist in a few other corners of the job market. Often, you can choose a joint life payout for the pension, but if for any reason you didn't, or if that option is not offered, a life insurance policy can replace the monthly pension if a partner is relying on that money, but the pension only covers one life. 
• Business Planning with what is known as "key man" insurance or other insurance plans that cover business partners, employees, and families can bridge the gap when a key person to a business passes. 
• Specific Bequests that you would like to make in specific dollar amounts can potentially be secured with life insurance. Keep in mind if the assets are going to charity, donating something like a portion of a retirement account could be more tax efficient (since the charity won't pay any tax). 

I've listed several good reasons to use permanent life insurance, like whole life, and there certainly are more. However, note a couple of things about these use cases:

• They are very specific. Certain people will immediately understand they fall into one of these cases, and the vast majority of individuals will realize they do not. 
• These are generally issues for later in life. Except for providing for a child with special needs, most of these are not problems that need to be solved in your 20s and 30s, making whole life potentially inappropriate at that age. Even for a business owner, while you're young, term life could be a suitable tool for business planning, with permanent life coming into play in later years. 

So, when it comes to your life insurance, don't overthink it. Be sure to buy what you need, and don't skimp on coverage. But don't overpay either, and let having the right insurance get in the way of other goals. Term life is very inexpensive for the coverage you get, so you can overestimate your coverage a bit to be on the safe side and still have a premium that leaves room to put money away for the things you actually want to save for.

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