Term vs. Permanent Life Insurance

What’s the difference between term and permanent life?

Like all life insurance policies, term insurance and permanent insurance were created to protect the financial well-being of your loved ones in case you pass away. What makes them different, however, comes down to a few basic factors: how long the coverage lasts, the features and benefits they offer, and how the premiums (your payments) are structured. Let’s look at how they compare.

Summary of coverage features

How long does the protection last? 

Permanent life insurance: As the name suggests, permanent life policies such as whole life, universal life, and variable universal life are designed to provide long-term—often lifelong—coverage. As long as you continue to pay your premiums, your coverage will be there for you whenever your beneficiaries need it.

Term life insurance: Conversely, term life policies provide temporary protection that lasts for a limited period of time (the term). In many cases, the coverage can be renewed, but only up to a specific age and your premiums will generally increase with each renewal.

What benefits do I get?

Permanent life insurance benefits: These policies generally offer long-term death benefit protection and other potentially valuable features. In particular, most permanent life policies give you the opportunity to build cash value. This feature can be especially helpful later in life since the cash value you accumulate grows tax-deferred and can be used to help pay for unexpected emergencies or milestone events like college and retirement.² Some permanent life policies, such as whole life insurance, are also eligible to earn dividends which can help increase the value of your coverage.⁴

Term life insurance benefits: With term coverage, you get short-term death benefit protection (often 10, 15, or 20 years), and your beneficiaries will receive a lump-sum death benefit if you pass away during this time. While term life does not offer any cash value accumulation, some allow you to convert your term coverage to permanent life insurance during the early years of coverage.

How much does the coverage cost?

Permanent life insurance: Since each type of permanent life insurance uses a different payment method, let’s focus on the most common, whole life. With whole life coverage, your premiums are locked in at the time of purchase and are guaranteed not to go up. As a result, whole life coverage may start out more expensive than term because it contains living benefits that term does not have , but in the long run it may prove to be a better value.  

Term life insurance: With term coverage, your premiums are locked in for the period of coverage you select. If you choose to renew your coverage, the premiums will increase annually. That’s why it’s important to carefully consider your time frame and select the length of coverage that fits your needs and budget.

Is the death benefit guaranteed?

Permanent life insurance: The death benefit on whole life insurance is guaranteed³—which means that as long as you keep up with your premiums, it will be paid whenever you pass away. With most universal and variable universal life policies, however, the death benefit can go up, or down, depending on the policy’s performance.

Term life insurance: When you select term life insurance, your coverage is guaranteed³ for the duration of your term—or your renewal period. That means that if you pass away while this coverage is in place, your beneficiaries will receive every penny of the death benefit (assuming all premiums have been paid).

Will my premiums go up?

Permanent life insurance: If you like certainty, one of the best things about whole life insurance is the fact that your cost of insurance never changes. Once you lock in your premiums, you never have to worry about them going up—even if your health changes down the road. With universal or variable universal life policies, however, your premiums are flexible so you can pay more, or less, as your circumstances change as long as you are meeting certain minimums to keep the coverage in force.

Term life insurance: When you select term life insurance, your premiums are fixed (locked in) for the duration of your term. The only time you will see an increase is if you decide to renew your coverage after your current term expires.

How do I know which coverage is right for me?

Choosing one type of coverage over another can be difficult—especially if this is your first time purchasing life insurance. Knowing that everyone has a unique set of needs, we recommend working with a New York Life agent. That way, you can go over all the information together and help you make an educated decision. In the meantime, the following guide may prove helpful:

Consider permanent life insurance if you:

• Need long-term financial protection.
• Would like to create an inheritance for your heirs.
• Could use a tax-advantaged way to save for future expenses.¹
• Prefer stable premiums (available with whole life)

Consider term life insurance if you:

• Need short-term coverage or additional protection during specific times.
• Are just starting out or are on a budget.
• Want some flexibility in case your needs or circumstances change.
• Have other financial assets to leave behind as an inheritance.

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¹The cash value component of a whole life policy grows tax deferred. Which means while the cash value grows you do not pay income taxes on it, allowing it to grow even faster. As protection needs change and the policy matures, the cash value can be accessed lifetime and if the policy is structured properly, you can access it usually income tax free. Certain tax advantages are no longer applicable to a life insurance policy if too much  money is put into the policy during its first seven years, or during the seven-year period after a “material change” to the policy.

²Accessing the cash value will reduce the available cash surrender value and death benefit.

³The guarantees of a life insurance policy are backed by the claims-paying ability of the insurer.

⁴Dividends are not guaranteed.

New York Life Insurance Company(NY,NY)