Term vs permanent life insurance: which fits your goal

Term life insurance covers you for a set period, often 10, 15, 20 or 30 years, and pays a death benefit only if you die during that term. It costs less for the same amount of coverage and suits temporary needs like a mortgage or raising children. Permanent life insurance, such as whole life and universal life, is designed to last your whole life as long as premiums are paid, and it can build cash value you may borrow against. It costs more and suits lifelong needs like final expenses, a surviving spouse's income or leaving a legacy. The question to ask is how long the need lasts.

The core difference

Within permanent coverage there are more variations: guaranteed universal life, which focuses on a lifetime death benefit with little cash value, and indexed universal life, which credits interest linked to a market index within limits. Each serves a different goal, so the label on the policy matters less than what the contract guarantees.

How term works, and what happens at the end

With term, you pick the death benefit and the length of the term. Premiums are usually level for the term. If you die during it, your beneficiaries receive the death benefit. If you outlive it, the coverage ends and there is no refund in a standard policy.

Many term policies include a conversion option: the right to turn some or all of the term coverage into a permanent policy without new medical questions, before a deadline set in the policy. That option can be valuable if your health changes, so check the conversion deadline when you buy.

Some term policies can be renewed after the term ends, but at a much higher premium based on your age at renewal.

Term premiums depend heavily on your age and health when you apply, so locking in a longer term while you are young and healthy can be worth the somewhat higher price. A 20 or 30 year term often fits a new mortgage or a young family better than a 10 year term that ends just when the need is still there.

How cash value actually works

Only permanent policies build cash value. Part of each premium goes to the cost of insurance and policy charges, and part builds cash value that grows on a tax-deferred basis.

With whole life, the cash value grows on a schedule shown in the contract. With universal life, the insurer credits interest to the cash value, and the amount you see depends on the interest credited, the policy charges and how much premium you pay. Indexed universal life credits interest linked to a market index, within caps and floors set by the policy; your money is not invested directly in the market.

Ask to see both the guaranteed and the non-guaranteed columns of any illustration before you decide.

• You can usually borrow against cash value. Loans accrue interest, and any unpaid loan reduces the death benefit.
• Withdrawals or surrendering the policy early can trigger surrender charges and, in some cases, taxes.
• Cash value builds slowly in the early years, so permanent coverage works best as a long-term commitment.

Which fits your goal

Always ask why you want the policy. If the need has an end date, such as a mortgage or children who will grow up, term is usually the efficient answer. If the need lasts your whole life, such as covering final expenses, providing for a spouse after you are gone or passing money to the next generation, permanent coverage is built for that.

A common middle path is to buy term for the large temporary need and a smaller permanent policy for the needs that never go away. Another is to buy term with a strong conversion option, so you can move some of it to permanent coverage later without new health questions if your health changes or your goals do.

• Young family, tight budget, big mortgage: usually term, sized generously.
• Couple near retirement who wants the surviving spouse protected for life: often permanent, or a mix.
• Someone in their 60s or 70s wanting funeral costs covered: a smaller permanent or final expense policy.
• Business owner funding a buy-sell agreement: depends on how long the agreement runs.

Buy term and invest the difference?

You will hear this advice often. It can work for disciplined savers whose need truly ends. It works less well if the difference never actually gets saved, or if you turn out to need coverage later in life when it costs far more or your health has changed. There is no universal answer, which is why the goal comes first.

Whatever you decide, review your coverage every few years. Marriage, a new child, a new home, a business, or paying off the mortgage all change the answer. A policy that fit perfectly at 35 may be too much or too little at 50.

Arizona protections and your free look

Every life policy sold in Arizona includes a free look period, printed on the policy, during which you can review it and return it for a refund. Use it: read the policy, the riders and, for permanent coverage, the illustration with its guaranteed and non-guaranteed columns.

The Arizona Life and Disability Insurance Guaranty Fund protects Arizona residents if a licensed life insurer becomes insolvent, up to $300,000 in death benefits and $100,000 in cash surrender value per life, according to the Arizona Department of Insurance and Financial Institutions.

Final expense: a small permanent policy for a specific job

Final expense insurance is a small whole life policy designed to cover a funeral, final medical bills and the costs of settling an estate. It usually has level premiums and coverage that lasts for life, and it is often available with simplified health questions or none at all.

For many Arizona retirees whose children are grown and whose home is paid off, that is the main life insurance need left. It means the people who love you can grieve without also having to find money in a hurry. Our guide to simplified and guaranteed issue life insurance explains how these policies are underwritten.

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The bottom line

Term or permanent is not a question of which product is better. It is a question of how long your need lasts. Read our Term Life Insurance and Permanent Life pages, then talk it through with Viola or Jacob. They will show you both side by side, subject to underwriting, with the guarantees spelled out plainly.