Term vs. permanent life insurance: Which is right for you?

Once you have decided to purchase life insurance, an important decision awaits you—choosing between term vs. permanent life insurance.

While these two options share certain features, they each have characteristics that appeal to people for different reasons, such as duration, cost and cash value. To make the right choice for you, it's important to understand the benefits of each type of life insurance.

In this article, we'll cover:

• The differences of term vs permanent life insurance at a glance
• How the length of coverage compares
• The cost differences
• How cash value in permanent policies works
• Converting term to permanent insurance

Term life insurance is the most straightforward type of coverage for your beneficiaries. If you pass away while the contract is in force, the people you have named will receive a specified death benefit. It can be an important financial safety net to have in place, but term insurance comes with a limited coverage period and does not have cash value.

Permanent life insurance also has a straightforward death benefit feature, but it can last as long as you live—as long as you continue to pay the monthly premiums—and has a cash value component. This means you can withdraw funds from it during your lifetime, making it both an estate planning tool and a versatile financial asset you can use for a wide range of needs down the road. There are a few varieties of permanent insurance, each of which has unique features: whole life, universal life and variable universal life.

The defining attribute of term life insurance is that it's only active for a certain number of years. Depending on the contract you choose, the term probably will last for a set period between 10 years and 30 years. Your beneficiaries only will receive a death benefit if you die during that timeframe.

When your original term ends, you would have to get a new term life insurance contract to continue your coverage. A common concern is that as you get older, you generally have to pay more for the same amount of insurance. It's likely a new term contract would cost more, and it's possible for you to be denied coverage altogether if you developed any significant medical issues in the meantime.

This type of policy has no expiration date or need for renewal. These contracts are designed to last a lifetime as long as the policy remains in force. Whole Life, a type of permanent life insurance, offers guaranteed coverage for a lifetime and premiums that won't increase even if your health status changes.

Because term life insurance involves a limited coverage period, it's the most affordable way to protect loved ones who depend on your income. It's a sound choice if you don't necessarily need the features of permanent life insurance.

The premiums for permanent life insurance tend to be much more expensive than term life insurance with the same death benefit. The tradeoff is that it lasts longer and you won't have to worry about your premiums increasing as you age or your health changes. Permanent life insurance also costs more because a portion of your premium helps fund your cash value.

How much life insurance do you need?

A life insurance policy can help protect your family financially should an unexpected death occur. But how much coverage do you need to protect the lifestyle your loved ones are living?

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When you purchase a permanent life policy, part of your premium payment funds the policy's death benefit, and another part helps build cash value—funds that you can access while you're living. In this way, you can consider permanent life insurance as an investment asset for your financial needs later in life. In contrast, term life insurance does not have a cash value component.

This cash balance can be used for anything, including covering major expenses, such as college tuition or income during retirement. Permanent life insurance cash value grows on a tax-deferred basis, and your withdrawals may be tax-free.

With a whole or universal permanent life insurance contract, the insurer pays interest on the cash value based on current market rates. Some contracts also provide a dividend—though it's typically not guaranteed—which you may be able to fold back into the cash value balance. Variable universal permanent life insurance has a savings component where the rate credited to your balance is based on the performance of investment subaccounts, so its growth is tied to market performance and fluctuations.

Generally, you can access your cash value balance in these ways:

• Withdrawal. You take money from the cash balance.
• Loan. You borrow money from the cash balance with the intent to repay.²
• Surrender. You receive the entire cash balance, but the policy is no longer in effect.
• Premium payments. You use the cash balance to pay for the contract.

Keep in mind that withdrawals and unrepaid loans from your cash balance likely will reduce the death benefit ultimately paid out to your beneficiaries. It's also worth noting that if you surrender your contract within a certain number of years of creating it, you may have to pay fees that also will reduce the cash payout. A financial advisor can answer any questions you may have and advise you on the wisest ways to access your cash value funds.

The relative affordability of term insurance makes it a popular choice for many people who may not be able to afford permanent life insurance. If your term covers your family during its most important stages—for example, before your children graduate from college—that may be all the protection you need.

But if you need a longer coverage period than your original term, many term life insurance products have a convertibility feature that allows you to switch all or part of your policy to permanent life insurance. You typically will not need a medical exam to demonstrate your insurability. Your permanent coverage is usually placed in the same risk class as your term policy even if your health has deteriorated since your first took out coverage.

That said, your premium likely will increase when you convert because you're getting lifelong protection and the benefits of cash value accumulation. The increase in price will be based on a number of factors, including:

• Your age when you convert
• How much of your original policy you convert
• The type of permanent life insurance you choose

Most life insurance carriers require you to perform a term-to-permanent conversion within a few years of your policy becoming active, so it's critical to be aware of when that window closes. Some policies may allow you to purchase extended-term conversion protection as a rider.

Ultimately, the choice between term and permanent life insurance comes down to your financial needs and budget. If you're looking for the most affordable way to provide support for your loved ones when you pass away, a term policy could be the right fit.

However, you may want to consider permanent life insurance if you're seeking a longer-lasting policy with a cash value component that grows over time. These policies can help cover a wide range of financial needs during your lifetime, from covering unexpected medical bills or a child's college tuition to supplementing your retirement income.

If you're not sure which type of insurance product best suits your needs, reaching out to a financial advisor may help. They can explain the pros and cons of each, factoring in your personal financial situation and goals, to provide customized insights and valuable guidance.