Understanding the Difference Between Term and Permanent Life Insurance for Your Long-Term Plan

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

If you’ve already done some research, you’ve probably noticed something: Different sources can give very different answers when it comes to life insurance. Some say term insurance is the simplest and most cost-effective option. Others emphasize the long-term benefits of permanent coverage.

That can make it feel like there’s a right answer you’re supposed to figure out.

The reality is that one option isn’t better than the other—because these are two very different tools designed for different needs. And each has trade-offs to understand:

Term life insurance

• Lower cost upfront
• Coverage lasts a specific period
• Does not build cash value
• Simpler but may expire before you need it

Permanent life insurance

• Higher cost
• Coverage lasts your entire life¹
• Builds cash value you can access while living
• More complex but also more flexible

Read on to find out more.

Comparing term vs. permanent life insurance

Term insurance is often a more affordable, lower-cost option allowing for a large death benefit (or coverage) with generally lower premiums. This is because the policies offer little flexibility and expire, meaning it’s likely you may not have coverage down the road if you need it. There’s a possibility that your policy will never pay a death benefit because the policy might expire before you die. And term life insurance does not build cash value.

Permanent life insurance generally has higher premiums but also has features that term life insurance doesn’t include, such as a lifetime death benefit that will be paid no matter how long you live1 while your policy is in place. Permanent life insurance also builds cash value that you can use during your lifetime (examples include an emergency fund, paying for a wedding, or starting a business).² Some insurance companies pay dividends. Although they are not guaranteed, they can add to the growth of your policy over time.

Term life insurance is usually best for you when you need a large death benefit for a situation that will end someday and when budget is also a concern. For example, if you have young children, you might choose a term that covers the time until they have completed their education and started their careers.

You may wonder what will happen if you outlive your term life insurance. Unfortunately, in this situation your loved ones would not get a death benefit. At the end of term life insurance, the policy simply ends, and there is no payout or return of premiums. (There may be a possibility of renewing, but the premium may be higher because you are older and/or your health may have gotten worse.)

People also ask if they can “cash out term life insurance.” In fact, there is no option to cash out since it does not build cash value. The policy simply expires.

Because of the different features of each type of policy, many people own a combination of both—term policies covering short-term needs and permanent policies that provide an ongoing benefit and flexibility in a financial plan.

Because of the different features of each type of policy, many people own a combination of both—term policies covering short-term needs and permanent policies that provide an ongoing benefit and flexibility in a financial plan.

Types of term life insurance

Although all term life insurance lasts for a specified time period, there are different types of term life policies to consider.

Level term life insurance

With level term life insurance, you pay the same premium for the length of the policy (10 years, 20 years, or to a certain age). You choose a term that works for you, and you can plan your budget knowing the premiums won’t change.

If you expect your income to grow, the premiums will become more affordable over time, as a fixed premium becomes a smaller part of your budget when your income is rising. For example, Level Term 20 covers you for 20 years, and your premiums will not go up throughout the entire period. During that time, you may get promoted or take a new job at a higher pay.

Annually renewable term life insurance

Unlike level term life insurance, annually renewable term life has premiums that increase over time. When you’re young, annually renewable term tends to be the most affordable type of policy, but as you reach the end of the contract duration, the premiums become more expensive. This type of term policy is often best when you’ll need insurance for a long time because it gives you more security and flexibility in your coverage options.

Types of permanent life insurance

Permanent life insurance can give you lifelong coverage and a cash value that can grow over the years. And like term insurance, there are different permanent policies you can choose from.

Whole life insurance

With whole life insurance, the cash value component grows at a set rate that is determined by your insurance company. The cash value in whole life insurance is not affected by the markets and is guaranteed⁴ to grow over time (as long as you don’t make policy changes). Your premiums will also remain the same for the life of the policy. Keep in mind that death benefit and cash value can grow more quickly through nonguaranteed dividends when you use them to purchase additional insurance.

When comparing whole vs. term life insurance, the cash value is one of the biggest differences aside from lifelong death benefit coverage.

Universal life insurance

Universal life insurance is more flexible than whole life insurance and may be a good choice for someone with more sophisticated financial needs. With universal life, you have flexibility to adjust the amount of your premiums (within certain limits) and your death benefit. This can be particularly beneficial for someone who has uneven income.

Variable universal life insurance

Variable universal life insurance⁵ gives you more control over how your cash value is invested. It gives you diversified investment options, including exposure to the stock market. You can adjust the amount of your premium payment (as opposed to having a fixed payment each year).

There may be years when you want to pay more into the policy than your minimum premium requires so that you can build more cash value. Some years, you may need to spend less on your premiums, which is OK as long as you have enough cash value to cover your policy expenses.

Is term life or permanent life insurance better for you?

When you’re considering whether term life insurance or permanent life insurance is best, consider how each type of policy fits into your overall financial plan.

And it’s not an all-or-nothing option. Many people get a mix of term and permanent insurance in order to get a large death benefit while still taking advantage of the additional benefits that permanent insurance offers.

You can convert term to permanent life insurance

Many term policies include a way to convert some or all of your coverage into a permanent policy within a specified time frame. Although you could get a new policy, a term conversion can be easier and less expensive than a new policy.

That’s because many companies allow you to convert without undergoing another health examination. Your premiums will still be affected by your age but not by any changes in your health. A Northwestern Mutual financial advisor can help explain how term conversion works.

Choosing between term and permanent life insurance doesn’t mean picking the better option—it comes down to choosing what fits your life right now and what you want your plan to do over time.

Both types of coverage serve a purpose:

• Term can provide affordable protection during your highest-need years.
• Permanent can provide long-term stability and flexibility throughout your life.

And for many people, it isn’t either/or—it’s understanding how each one works and deciding what role, if any, each should play.

If you’re still unsure, that’s completely normal. This decision is less about the product itself and more about questions like these:

• How long do I need protection?
• Who am I trying to protect or provide for?
• How do I want my financial plan to evolve over time?

When those answers become clearer, the choice usually does too.

Start by understanding your needs—then choose the coverage that supports them. Your Northwestern Mutual financial advisor can help.