Life insurance is a valuable tool that ensures your spouse, children or anyone else who depends on you financially isn’t stuck with unmanageable expenses if you pass away. There are many choices when picking a life insurance policy, but one of the first decisions you’ll need to make is whether you want term or permanent life insurance.
Term Life Insurance
With term life insurance, you choose a specific period during which you enjoy level rates that won’t change. This is usually anywhere from 10 to 30 years.
If you pass away while the policy is in force, your beneficiaries receive a payout known as the death benefit. If you outlive the level term period, it expires unless you choose to renew the policy. (Not all term life insurance policies are renewable.)
Many term life insurance policies allow you to convert the term life to permanent life insurance during a specified window of time.
Types of term life insurance
Different types of term life insurance policies that meet specific needs include:
- Level term life insurance: The premiums remain the same throughout the term period, such as 20 years.
- Annual renewable term life insurance: The policy’s premiums increase yearly when you renew it. Coverage is guaranteed, and you don’t need to reapply each year. However, it’s smarter to buy a 10-year (or longer) term life policy if you need life insurance for more than a few years.
- Decreasing term life insurance: While the policy’s premiums remain the same over the length of the term, the death benefit decreases gradually over time. Decreasing term life insurance is usually used to cover a debt that’s being paid down.
- Return of premium term life insurance: If you outlive the policy, the premiums you paid are refunded. This feature makes this type of term life insurance policy more expensive.
Term life insurance cost
Term life insurance costs an average of $480 a year for a 20-year, $1 million policy for a 30-year-old male in good health. The same policy costs $348 a year for a 30-year-old female in good health.
Age plays a big factor for life insurance buyers, with coverage becoming more expensive as you age. A life insurance buyer who is 70 years old, for instance, can pay over 1,000% more compared to a 30-year-old (30-year term policies are generally not available to those over age 70).
Personal characteristics, such as your sex, medical history, height, weight, criminal record and history of tobacco and drug use, impact your term life insurance costs.
See term life insurance costs by age
Term life insurance pros and cons
Term life insurance can be a smart, affordable way to gain some financial security for your family, but it’s not the right choice for everyone. Here are some of the major pros and cons of term life insurance.
- Less expensive: One of the biggest benefits of term life insurance is that it is less expensive than permanent life insurance.
- Coverage only when you need it most: Instead of paying for insurance for your entire lifetime, you can limit it to when you have the highest financial obligations. For instance, you may no longer need coverage once your mortgage is paid off and your kids are grown.
- Frees up funds for other goals: Since term life insurance premiums are cheaper and paid over a set period, you have more cash flow to put toward other goals, such as investing and saving for college.
- Level rates will end: You may still need life insurance once your level term period is up. Once it expires, you may be able to renew the policy, but term life insurance renewal costs are extremely high and go up each year you renew. You may find that a new policy is also very expensive, depending on your age and health.
- No cash value: Unlike permanent life insurance, term life insurance doesn’t offer the opportunity to grow cash value and earn returns over time.
When should I consider term life insurance?
Term life insurance is ideal for people who have others who depend on their income. For instance, young parents who want to cover their working years are good candidates for term life insurance.
Permanent Life Insurance
Permanent life insurance often doesn’t have an expiration date. As long as the premiums are paid, most permanent life insurance policies can remain in-force as long as you’re alive.
When you pay your premiums, a portion goes toward the cash value account. This cash value can grow over time, and you can access the money while you’re alive. You can withdraw funds, borrow against the policy or surrender the policy for cash.
Types of permanent life insurance
- Whole life insurance: Whole life insurance covers you for your lifetime. These policies have guaranteed premiums, guaranteed cash values and guaranteed death benefits.
- Universal life insurance: This type of permanent life insurance typically offers more flexibility than traditional whole life insurance policies. Universal life insurance often allows you to adjust your premium payments and death benefit within certain limits. The rate of return on your cash value and any investment options vary depending on the type of UL policy you buy (guaranteed, indexed, variable, etc.).
- Variable life insurance: With variable life insurance, you take on more investment risk in order to potentially reap higher gains (and potentially greater losses as well) on your cash value. These policies allow you to invest your cash value across a choice of stocks, bonds and money market funds. The options will vary by company and policy.
- Burial/final expense life insurance: Burial insurance policies are usually whole life insurance policies in small amounts that are meant to cover the funeral cost. They don’t require a medical exam, and you can’t be turned down for a policy. They are also very expensive for the amount of coverage you buy.
- Survivorship life insurance: Also known as joint life insurance, survivorship life insurance provides coverage for two people. A death benefit is paid to beneficiaries once both people pass away.
Permanent life insurance cost
Like term life insurance, permanent life insurance rates are based on various factors, including age, gender and health. Permanent life insurance is more expensive than term life.
Average whole life insurance rates per year for $250,000 in coverage
Buyer Whole life insurance cost
Female, age 30 $2,219
Female, age 40 $3,296
Female, age 50 $4,837
Male, age 30 $2,536
Male, age 40 $3,639
Male, age 50 $5,220
Source: Forbes Advisor research. Average is based on the three lowest quotes we found online for nonsmokers of average height and weight.
Average universal life insurance rates per year for $250,000 in coverage
Buyer Universal life insurance cost
Female, age 30 $1,157
Female, age 40 $1,679
Female, age 50 $2,456
Male, age 30 $1,254
Male, age 40 $1,814
Male, age 50 $2,663
Source: Forbes Advisor research. Average of the three lowest quotes for nonsmokers of average height and weight.
Permanent life insurance pros and cons
Lifetime coverage: As long as you continue paying your premiums, most types of permanent life insurance do not expire.
Cash value: Permanent life insurance policies have a cash value component that grows over time. You can use these funds while you’re alive.
Extra tax benefits: In addition to a tax-free death benefit for beneficiaries, permanent life insurance also offers tax-deferred growth on the cash value and tax-free life insurance policy loans.
Expensive: Permanent life insurance is considerably more expensive than term life insurance.
Policy can lapse: If you fail to pay the premiums due, the policy can lapse, which means you lose the death benefit and cash value.
When should I consider permanent life insurance?
Permanent life insurance is worth consideration if you’re seeking lifetime coverage and the added benefits of cash value.
Like term life insurance, permanent life insurance offers protection to loved ones, so they aren’t financially burdened if you die. But permanent life insurance also offers an investment component and greater flexibility in many cases. That also means it is considerably more expensive.
Comparing Term Life Insurance vs. Permanent Life Insurance
If you’re deciding between term and permanent life insurance, here are some of the main characteristics to compare.
Term life insurance Permanent life insurance
Level term period lasts for a specified period (usually 10 to 30 years) Lifelong coverage possible
No cash value Cash value that grows tax-deferred
Lower premiums Higher premiums
Term Life or Permanent Life: Which Is Best for You?
Term life is best for…
People who want affordable premiums and coverage when their financial obligations are at their highest.
Permanent life is best for…
People who want lifetime coverage, access to cash value and who can afford the higher premiums.
How Much Life Insurance Do I Need?
Deciding how much life insurance you need is vital to making sure your financial obligations are met, and your loved ones are taken care of if you die.
Consider the financial obligations you need to cover, then subtract any existing assets you have to pay those obligations. The difference is your minimum life insurance need. Or, use our life insurance calculator for a quick and easy way to determine how much life insurance you need.
Alternatives to Term and Permanent Life Insurance
Life insurance is a valuable tool for protecting loved ones financially. But it’s not your only option. Some alternatives to buying standard term or permanent life insurance include:
Pre-need life insurance: These plans allow you to choose the type of services you want and set aside funds over time to pay for it so that the burden is not left to loved ones. They are purchased directly through funeral homes.
Accidental death and dismemberment (AD&D) insurance: This type of life insurance only pays out a benefit only when an accident causes death or specific serious injuries, such as the loss of a limb or paralysis. It can be purchased as a standalone policy or added to a life policy as a rider.
Dedicated savings account: You also have the option to put funds in a savings or investment account, which can be left to a beneficiary after you die. This gives you more control over how much you set aside and how the funds are invested. However, you won’t reap the same tax benefits that life insurance policies provide.