Term vs. Permanent Life Insurance: What’s the Difference?

Choosing the right life insurance policy starts with understanding the two main types: term and permanent. While both offer financial protection for your loved ones, they work very differently when it comes to duration, cost, and long-term value.

In this guide, we’ll explore “what is the difference between term and permanent life insurance?” by breaking down the key differences between the two types, how to decide which is right for you, and what to consider before applying.

What Is Term Life Insurance?

Term life insurance provides coverage for a specific period, typically between 10-30 years. If you pass away during the term, your beneficiaries receive the policy’s death benefit. If the term ends and you’re still living, the coverage expires with no payout.

One of the biggest appeals of term life insurance is its simplicity. It’s straightforward, easy to understand, and usually more affordable than permanent life insurance. Because premiums are fixed for the length of the term, it can be a predictable, budget-friendly way to protect your family financially.

Term life is especially useful during your peak earning and responsibility years. It’s a strong choice if you want coverage for specific needs such as replacing your income while raising children, covering a mortgage, or providing financial security during a partner’s retirement planning years.

What Is Permanent Life Insurance?

Permanent life insurance is designed to last your entire lifetime (as long as premiums are paid). Unlike term coverage, it doesn’t expire after a set period. It also includes a cash value component that grows over time and can be accessed while you’re alive through loans or withdrawals.

There are different types of permanent policies, including whole life and universal life. Whole life offers fixed premiums and guaranteed growth of cash value, while universal life tends to be more flexible, allowing you to adjust premiums or death benefits over time.

Because of the lifelong coverage and added features, permanent life insurance is generally more expensive than term. However, it can be a good fit for people with long-term financial goals, such as leaving an inheritance, funding a trust, or covering estate taxes. It may also appeal to those looking for a way to supplement retirement income through the policy’s accumulated cash value.

Key Differences Between Term and Permanent Life Insurance

Here’s a quick visual breakdown of term vs permanent life insurance:

Pros and Cons of Term Life Insurance

Pros:

• Affordable coverage: Premiums are typically much lower than permanent policies, especially for younger, healthier individuals.
• Simple to understand: Straightforward structure with fixed premiums and a set coverage period.
• Great for temporary needs: Ideal for covering things like a mortgage, children’s education, or income replacement during working years.
• Flexible term lengths: Common options include 10, 20, and 30 years, so you can align coverage with your financial timeline.

Cons:

• Coverage expires: Once the term ends, coverage stops unless you renew or convert (often at a higher cost).
• No cash value: Term policies do not build savings.
• May outlive the policy: If you’re still alive at the end of the term, there’s no payout and no return of premiums (unless you pay extra for that feature).

Pros and Cons of Permanent Life Insurance

Pros:

• Lifelong protection: As long as you pay premiums, your loved ones are covered no matter when you pass away.
• Builds cash value: A portion of your premiums grows tax-deferred over time and can be accessed via loans or withdrawals (but will reduce death benefit).
• Fixed premiums (for whole life): Premiums remain the same for life in many permanent policies, making budgeting easier long-term.
• Useful for estate or legacy planning: Can support charitable giving, wealth transfer, or covering estate taxes.

Cons:

• Higher cost: Premiums are significantly more expensive than term, which may not be feasible for all budgets.
• More complex: Understanding the cash value component, fees, and policy types can be more challenging.
• Long-term commitment: These policies are designed to be kept for life. Cancelling early may reduce or eliminate the benefit of the cash value.

Permanent life insurance vs term life insurance

Choosing the right type of life insurance depends on your age, financial goals, family situation, and how much you’re able to spend on premiums.

Budget is often the first deciding factor. Term life is usually more affordable, especially for younger individuals or families managing other expenses. If your goal is to get solid coverage without stretching your monthly budget, term is likely the better fit.

Age and stage of life also matter. For instance:

• If you’re 35 with young children and a mortgage, a 20- or 30-year term policy could provide affordable protection during your highest-need years.
• If you’re 55 and thinking about long-term care, estate planning, or leaving a legacy, a permanent policy may better align with your goals.

Dependents and financial responsibilities are another consideration. If your loved ones rely on your income, or if you have long-term financial commitments, coverage that matches those needs is important. Term can align well with short- to medium-term needs, while permanent life can offer peace of mind for lifelong support.

Long-term goals like building cash value, donating to charity, or helping heirs with taxes might tip the scale toward permanent insurance despite its higher cost.

If you’re still unsure which is right for you, speaking with a licensed life insurance advisor can help you evaluate your personal situation and find a policy that fits both your needs and your budget.

Scenarios to Help You Decide Between Permanent Life Insurance vs Term

1. Term Example:

Jenna is 32, married with two young kids and a mortgage. She and her spouse are working hard to save for college and retirement, but their budget is tight. A 20-year term life insurance policy provides enough coverage to protect her family during the years they need it most, without adding financial strain. If something were to happen to her, her family could use the death benefit to cover daily expenses, pay off debt, or fund future education.

2. Permanent Example:

David is 60 and has built significant wealth over the years. He wants to leave a legacy for his children and grandchildren, and also help cover potential estate taxes. A permanent life insurance policy aligns with his long-term plans. The policy's guaranteed death benefit and potential for tax-deferred cash value growth give him peace of mind, knowing his family will be financially protected when he passes away.

What is the Difference Between Term and Permanent Life Insurance?

Whether you’re leaning toward term life for its simplicity and affordability, or considering permanent coverage for lifelong protection and added financial benefits, the right policy should align with your budget, goals, and future needs.

Still unsure which type fits best? Ethos makes the process easier. With flexible policy options, an easy online application, and no medical exam required (just answer a few health questions) you can get life insurance that works for your life today and your family’s future tomorrow.

Explore your options with Ethos and get a personalized quote in minutes.

FAQs on Term vs Permanent Life Insurance

Term vs permanent life insurance, which is better?

Neither is ‘better’ – your choice depends on your goals and budget. Term life is often more affordable and can be ideal for temporary needs like income replacement or mortgage protection. Permanent life insurance costs more but lasts a lifetime and includes a cash value component that can grow over time. A licensed advisor can help you weigh your options based on your situation.

Can I convert a term life policy to a permanent one?

Many term policies offer a conversion option, allowing you to switch to permanent coverage without a medical exam (although premiums will likely be higher). There’s usually a time limit or age cap, so it’s smart to check your policy’s specific rules. Converting can be a good option if your needs change or if you develop a health condition that makes new coverage harder to get.

Why is permanent life insurance more expensive?

Permanent policies are designed to last your entire life and often include a cash value component that grows over time. These added features come at a higher cost than term life, which only provides coverage for a set number of years and has no cash value.

Does permanent life insurance build cash value over time?

Yes. Most permanent life policies, such as whole life or universal life, include a cash value account that grows tax-deferred. You can borrow from it or, in some cases, withdraw funds. However, it’s important to note that doing so may reduce the death benefit or trigger a taxable event.

What happens when a term life insurance policy expires?     

When the term ends, coverage stops and no death benefit is paid out if the insured is still living. Some policies allow you to renew annually or convert to permanent life, but the cost may increase. It’s a good idea to reassess your needs before the term ends.

Can I cancel a permanent life insurance policy?

Yes, you can cancel or surrender a permanent policy at any time. If the policy has built up cash value, you may receive a portion of it back. However, surrender charges and taxes could apply depending on the circumstances.

What are the tax benefits of permanent life insurance?

Permanent life insurance offers several tax advantages. The death benefit is generally paid tax-free to your beneficiaries. The cash value grows tax-deferred, and loans taken against it are usually not taxed (unless the policy lapses or is surrendered with an outstanding loan balance).

Can I have both term and permanent life insurance?

Yes. Some people use a “laddering” or blended approach, combining term life for temporary needs and permanent life for lifelong protection or estate planning. This strategy allows for more flexibility as your financial situation evolves.

Does permanent life insurance ever expire?

Generally, no. As long as you continue paying the required premiums, permanent policies are designed to last your entire life. However, some universal life policies may lapse if cash value runs low and premiums aren’t maintained, so it’s important to monitor the policy regularly.