“Should I get term or whole life?” is one of the first questions people ask us. Online, it sounds like a fight: one side says term is the only smart choice, the other says permanent coverage is the only real protection.
Both sides miss the point. Choosing life insurance works a lot like choosing a place to live. Sometimes renting makes the most sense. Sometimes owning does. Many families do a little of both.
Term insurance is like renting
Renting gives you full use of a home for a set period at a lower monthly cost, but no equity. When the lease ends, you renew at a higher price or move out. Term life insurance works the same way:
- It covers a set period, commonly 10, 20 or 30 years.
- It usually costs the least for the coverage. The NAIC Life Insurance Buyer’s Guide calls it “lower-cost coverage for a specific period of time.”
- It generally builds no cash value. If you outlive the term, the coverage ends and nothing comes back to you.
- Renewal is possible but pricier. According to the NAIC, most term coverage can be renewed at the end of the term even if your health has changed, but renewal premiums are higher, and some policies stop allowing renewal at a certain age.
Many term policies also include a conversion option, which lets you switch some or all of your coverage to a permanent policy without new health questions. The new premium is generally based on your age when you convert, and the deadline and the policies you can convert into vary by insurer. Find that language in your policy now, while you still have choices.
If you have life insurance through work, FEGLI or VGLI, you are already renting. Group coverage generally ends or shrinks when the job ends, and FEGLI optional coverage and VGLI premiums rise as you get older. That’s why so many people discover their coverage gap in their 60s, right when replacing it costs the most.
Renting fits best when the need has an end date: the years left on a mortgage, the years until the children are grown, or the working years your family depends on your paycheck.
Permanent insurance is like owning
Owning costs more each month, but you can stay as long as you keep up the payments, and you build equity. Permanent life insurance works the same way:
- It’s designed to last for life, as long as the premiums are paid as required.
- It costs more for the same amount of coverage, because the insurer expects to pay a claim someday.
- It builds cash value. The NAIC notes that in some policies, values are low in the early years and build later on.
- You can usually borrow against the cash value. Unpaid loans and withdrawals generally reduce the amount your family receives, and if they grow too large, they can cause the policy to lapse.
Two things most people are never told. First, with most standard policies, your family receives the death benefit, not the death benefit plus the cash value. The cash value is a living benefit for you, not an extra payout for them. Second, cash value generally grows tax-deferred, and policy loans are generally not taxed while the policy stays in force. If a policy lapses with a loan outstanding, though, part of that loan can become taxable income.
The main types: whole life, with premiums on a set schedule; universal life, with flexible payments, though the NAIC cautions you may have to pay a much higher premium to keep it if the insurer’s earnings or costs change; and final expense, usually a smaller whole life policy for funeral costs and final bills.
Owning fits best when the need doesn’t have an end date: final expenses, a legacy for children or grandchildren, a gift to your church, or a spouse who will need support no matter when you pass.
Side by side
| Term (renting) | Permanent (owning) | |
|---|---|---|
| How long | A set period, such as 10, 20 or 30 years | Designed to last for life, as long as premiums are paid |
| Cost | Usually lower for the same coverage | Usually higher for the same coverage |
| Builds value | Generally no | Yes, through cash value |
| Best for | Needs with an end date | Needs that last a lifetime |
| Watch for | Higher renewal prices and conversion deadlines | Loans, missed payments and, for universal life, rising costs |
What about “buy term and invest the difference”?
It works for some people, if two things hold true: you actually invest the difference every month for decades, and your need truly ends when the term does. If either fails, you can reach your 60s with no coverage and less saved than planned. Permanent coverage makes more sense when the need is lifelong, or when you value guarantees.
Why many families do both
Hypothetical example for illustration
A couple in their mid-40s has 20 years left on their mortgage and two children still at home. They choose a 20-year term policy large enough to pay off the house and replace income while the children grow up. They also choose a smaller permanent policy to cover final expenses and leave something behind, whenever that day comes.
They rent for the big, temporary needs and own for the lasting ones, without paying permanent prices for every dollar of coverage.
Three mistakes we see most often
- Letting term run out without a plan. People reach the end of a 20-year term in their 60s, health changed, and find the conversion window already closed.
- Buying more permanent coverage than the budget can carry. A policy that lapses after a few years protects no one. The right policy is one you can keep.
- Cancelling an old policy too soon. The NAIC’s advice is clear: don’t cancel your current policy until you get the new one.
Questions to ask before you choose
- Which of my needs end, and when? Which ones last for life?
- If I buy term, can I convert it, until what date, and into which policies?
- If I buy permanent, what’s the highest premium I could ever be asked to pay, and what happens if I miss one?
The bottom line
Term isn’t “cheap insurance,” and permanent isn’t “expensive insurance.” They are two tools for two different jobs. List your needs, mark which ones end and which ones last, and the right mix usually becomes clear.
If you would like help seeing how life insurance fits alongside your pension, TSP or 401(k), Social Security and savings, join us for our complimentary Executive Retirement Briefing, “Is Your Retirement Actually Positioned?”
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This article is for educational purposes only and is not individual tax, legal or insurance advice. Coverage availability, pricing and policy features vary by insurer, state, age and health, and are subject to underwriting. Guarantees depend on the claims-paying ability of the issuing insurance company.
