Why Permanent Life Insurance Isn’t Right for Most People

Permanent life insurance is typically more expensive and complex than what most people need.
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Written by Eric Goldschein
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Reviewed by Tony Steuer
Life insurance expert
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Edited by Lisa Green
Assigning Editor
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For people seeking financial security in the case of an untimely death, there are two main types of life insurance: term and permanent. However, most people don’t need permanent life insurance.

You might assume permanent life insurance is the better choice because it never expires as long as you pay your premiums. Perhaps that’s why many buyers end up with permanent policies. The 2020 Insurance Barometer Study by LIMRA, a life insurance trade group, found that 51% of policyholders had permanent coverage only, while 33% had term coverage only.

If you’re looking into a plan for yourself, don’t let those numbers influence you. Although permanent life insurance is appropriate in some situations, term life insurance is less complex and more affordable — particularly for young, healthy people.

Here's more about each option and how to decide which is right for you.

Comparing the options: term vs. permanent life insurance

If your sudden death would cause someone in your life to suffer financially, life insurance is a smart choice. The life insurance death benefit can cover debts, replace your lost income or help pay for your children’s education.

There are various types of term and permanent life insurance, but the broad strokes of each are as follows:

  • Term life insurance typically covers a set number of years. Once the policy ends, so does your potential death benefit, so this coverage pays out only if you die while your plan is active.

  • Permanent life insurance generally lasts for the rest of your life. These policies usually accrue a cash value over time. Once you’ve accumulated enough cash value, you can begin borrowing against or withdrawing cash from your policy.

Permanent life insurance: pros and cons

Permanent life insurance is best if your beneficiaries will need the money from the policy even if you die decades from now. For example, if you know you’ll have lifelong dependents, such as a child with a disability, or want to help your heirs pay hefty inheritance or estate taxes or even funeral costs, a permanent life insurance policy is probably the way to go.

But there are drawbacks:

Permanent life insurance is much more expensive than term life. Whole life, the most common type of permanent coverage, can cost 20 times as much as 20-year term coverage for a 30- or 40-year-old healthy applicant buying a $500,000 policy, a comparison of average life insurance rates shows. If you choose permanent life insurance but later find you can’t keep up with the monthly premiums, your policy may lapse and you’ll run the risk of having no coverage when you die.

Permanent life insurance is often more complex than term life due to its cash value component. And while your policy may build cash value over time, insurance can be an expensive way to save for retirement given the premiums.

The benefits of choosing term life insurance instead

Many people will outgrow the need for life insurance as they put away savings, pay off their debts and finish raising their kids. That’s what makes a term policy compelling: It can cover you for the years you need it, and then you can reassess your need for life insurance.

The lower cost of term life insurance is always beneficial, but it’s especially important in volatile times such as a recession or pandemic, when you could more easily lose your job and your ability to pay a high premium.

And while term life doesn’t have cash value, many policies now include “living benefits” that allow you to withdraw cash in certain circumstances. For example, you might be able to access some of your policy’s death benefit if you become critically or terminally ill.

The point is for your policy not to pay out

If you outlive your term life insurance policy, that’s a good thing. Your goal is to live a long and healthy life — not to die early so that your term life insurance pays out.

That said, choose the life insurance plan that is best for you. You can compare life insurance quotes for term policies online or speak to a trusted financial advisor to understand the costs of permanent life insurance if you decide that’s a better fit.

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