You’ve probably heard that buying life insurance is one of the best ways to protect your family financially. So intuitively, getting coverage that’ll last for your entire life (permanent life insurance) probably sounds like a better option than getting coverage that will last for just 10 or 20 years (term life insurance). After all, you’re going to love your family until the day you die. So why would you protect them for just part of your life when you can protect them for the entire time you’ll be alive?
But just like when it comes to seasoning food or selecting toppings at a sundae bar, more isn’t necessarily better when it’s time to buy life insurance. That’s why for most people, permanent life insurance isn’t the best type of coverage to buy.
What’s the purpose of life insurance?
Before we dive into the pros and cons of permanent life insurance, let’s talk about why you need life insurance in the first place.
Life insurance protects your family financially in the event that you die and your income isn’t around anymore to support them. You can think of it like a security blanket—just not the warm and fuzzy kind you had as a kid.
To be more specific, life insurance is designed to protect people who are financially dependent on you. So in most cases, you need life insurance only for years during your life when your dependents are most vulnerable (e.g., when your children are young or your debt is at its highest).
What is permanent life insurance?
There are two types of life insurance policies: term life insurance and permanent life insurance.
Term life insurance provides coverage for a fixed number of years, usually 10, 20, or 30 years. You typically select the policy length based on the number of years you expect to need protection for. If you die while holding the policy, your beneficiary will receive your death benefit. But if you die after your policy expires, your death benefit won’t be paid out.
In comparison, permanent life insurance provides coverage for the rest of your life (even if you don’t actually need protection beyond a certain age). The most common types of permanent life insurance are whole life insurance or universal life insurance. With permanent life insurance, your beneficiary will receive your death benefit no matter when you end up passing away.
So if you have a term life insurance policy, your insurer may have to pay out your death benefit (if you die while holding your policy). But if you have a permanent life insurance policy, your insurer will definitely have to pay up sooner or later. And how do insurers account for this guaranteed expense? By making permanent life insurance much more expensive than term life insurance.
So even though the idea of getting lifelong protection may seem appealing, permanent life insurance is a sky-high expense that you may not even need.
When permanent insurance might not make sense
Wondering if you can skip the pricey premiums of permanent life insurance and get term life insurance instead?
Permanent life insurance might not make sense for you if…
- You’re on a budget: Permanent life insurance is usually a whopping 5–15x the cost of term life insurance!
- You expect to have limited financial obligations in the future: If you don’t expect to have dependents (e.g., young kids or aging parents) or debt (e.g., a mortgage) well into the future, why pay insurance premiums for the rest of your life?
- You want insurance without an investment component: Permanent life insurance differs from term life insurance in several ways. One difference is that permanent life insurance has a death benefit and a cash value. The cash value is an investment-like product that’s coupled with the insurance policy.
- You want to make more strategic investment decisions: You’ll earn interest on the cash value of your permanent life insurance policy. But this amount will usually be lower than what you’d get if you invested your money in other ways.
When permanent insurance might make sense
Most people are better off buying term life insurance instead of permanent life insurance because they’ll need coverage for only a certain number of years. That said, there is a situation where having permanent life insurance may make sense. Specifically, if you’ll have to pay estate tax on your estate when you die, having a permanent life insurance policy could come in handy.
Unlike a mortgage, estate tax isn’t an expense that you can pay off earlier in life when you’re still covered by a term life insurance policy. The taxman will come for your estate tax only once you die and your final tax return is filed. So if you want insurance that would be able to cover the cost of estate tax no matter when you die, buying permanent life insurance may make sense.
Cost comparison of term vs. permanent life insurance
As we mentioned earlier, a permanent life insurance policy is usually 5–15x times more expensive than a comparable term life insurance policy.
Check out the table below for more details on how the costs of term vs. permanent life insurance stack up:
|$250,000 20-year term life insurance||$250,000 whole life insurance|
|Male, aged 30||$18/month||$135/month|
|Female, aged 30||$15/month||$121/month|
|Male, aged 40||$28/month||$204/month|
|Female, aged 40||$22/month||$178/month|
|Male, aged 50||$72/month||$327/month|
|Female, aged 50||$51/month||$279/month|
So as you can see, if you want the best bang for your buck, term life insurance is your best bet.
The final word
Depending on your needs, you may realize that you can skip out on the lifetime financial commitment of buying permanent life insurance and opt for term life insurance instead. Or you may decide that buying permanent life insurance truly does make sense in your case.
No matter which type of life insurance you end up buying, be sure to shop around for the best rates. Even for the same type of term policy or permanent policy, different reputable insurers will have wildly different rates. So it pays to do your homework and find a competitive price. After all, whether you buy term or permanent life insurance, you’ll be paying those monthly premiums for a while.