Perm versus Term Life Insurance – Why You May Need Both!

Usually, the most frequently asked question when people consider life insurance is, “what’s the price?” That question can’t easily be answered simply since there are just so many variables involved such as age, health, face value, and the type of the insurance which then results in widely differing premiums. That’s a good reason to first ask this question: “which kind of insurance is best for me, perm or term?”

In the perm versus term life insurance debate, most experts will tell you to buy term. But there are reasons you may need both.

The Perm versus Term Life Insurance Dilemma

When you are looking for a low price, quite often term policies are most attractive and most purchased. You may be assuming when purchasing that policy that you will never have to purchase another insurance policy again. That’s not necessarily a good assumption.

Term insurance, the low price option, has a set term (10, 20, or 30 years for example) and the rates go up at set intervals (like every 5 years), eventually becoming quite expensive as you reach your older years. Permanent life (also known as whole life, universal or endowment life) is at a consistent permanent price which has the advantage of being worry free because it keeps the same premium and face value to age 100. After that, the value is continued although you no longer have to pay any premiums. So how do you decide which one is the best for you is the dilemma.

Other Differences

Another difference between perm life insurance and term is that perm builds cash value. Simply put, this is a benefit because you pay your life insurance premiums long before you die—or at least you hope so. The company invests that money while waiting for a claim against it. Since they are making money on your money, they put part of it into the policy so that the cash value grows. If you live to be 100, your cash value and your death benefit eventually will be equal.

Some people will tell you that perm life insurance is the most expensive kind. Actually, this is “iffy” and only true up to a certain point.

The Total Cost Isn’t Always Easy to Figure Out

Term life seems to glorify its deceptively low premium. It’s true that a person in his or her 20’s will be able to purchase a $100,000 term life policy cheaply, in a range say between $15 and $30 a month, depending on actual age and any health conditions and types of riders that might be added. A perm life policy for the same person might be twice as much initially per month to purchase.

However, what agents often neglect to explain is that in the long run, purchasing a perm life policy at a young age will ultimately cost less than purchasing a 20-year term and then trying to renew it in your later years, say at age 50. The increases in cost on a term policy that has reached the end of its term’s initial period limit become phenomenally high when they are renewed. On the contrary, a perm life policy purchased and kept until old age can ultimately cost thousands of dollars less than keeping and renewing a term policy. Starting out with a term policy and then adding on a perm life policy in anticipation of dropping the term when it no longer suits your needs may be your best and least expensive bet.

One Bit of Caution

Many employers offer group life insurance policies for low or no cost to you (term life) and that’s great to have. Keep in mind that if you change or lose your job you may lose that insurance coverage and your next employer may not offer a policy. You would then be left out in the marketplace and need to “qualify” for a policy on your own. Even if you can take your policy benefit with you when you leave an employer, you will probably have much higher premiums and reduced coverage making it less than what you really need and want.

Perm Life Can Be a “Real” Asset

Perm life has another advantage that term does not have. It creates an opportunity for additional retirement assets. If you decide after retirement that you really don’t need that much life insurance, you can convert it to a fixed annuity and use the funds as you need them. Of course, you will be converting the cash value, not the face value, so you need to know how much cash your policy has actually accumulated.

Perm life can also be a source of emergency funds. While it is not advisable to borrow against your life insurance unless it is truly necessary, it is a funding source of last resort. You don’t even need to pay back the loan itself although you will need to make sure that you pay the interest each year.

While some people consider this an investment, it’s really not an investment in traditional terms and shouldn’t replace the need to invest for your retirement.

Why You May Need Both

When trying to get the most bang for your buck, it’s tempting to get term insurance only, and this is what most experts recommend. It’s also what I’d recommend when you’re young and healthy.

But there are two main purposes of life insurance. The first is to protect a growing family from financial disaster if a breadwinner dies, especially when children are involved. Many people also want their insurance to provide for their children’s college education if they were to die at a younger age.

The second reason for life insurance is to pay for final expenses when someone dies. This includes the funeral, medical expenses, etc.

Protecting your family when your death would cause major financial devastation means you try to determine the amount of a death benefit you will need for all of those contingencies (e.g. a rule of thumb might be 5 times your yearly income). You can get hundreds of thousands of term insurance coverage for a few hundred dollars per year when young and healthy. That makes term a needed choice for families’ insurance needs.

While we tend to think that older people will only need life insurance for the second purpose, and will probably be able to “self insure” by that point, that’s not always the case. In fact, many older folks still need to provide for their spouse, especially if they haven’t adequately saved for retirement or they still have major debt to cover such as a mortgage. Or they may need to provide for a special needs child or other family situation. For these needs, perm life is practically the only choice because of its affordability to those who are older or no longer healthy.

My Choice

It also makes sense to purchase whole life when it’s at the lowest possible premium. Many advisors think that you shouldn’t buy whole life ever (invest the money you’d be spending into mutual funds instead). There will eventually come a time when your kids are grown and gone and you will be heading towards retirement and the need to have a large (and now getting really expensive) term policy is no longer necessary. That’s when your insurance needs may be best served by perm life.

Those funds are guaranteed to be there and mutual funds may not be when and if you need them. The younger you are and the healthier you are when you purchase whole life, the cheaper it is and it will stay that way. It will serve and cover for your final needs which now might be you biggest concern.

Having those policies overlap at some point and then eventually discarding the term policy as its need wanes because your safety net can protect you affordably is what I personally recommend. Or convert the term life policy to a whole life policy if that’s available. 

Whichever type of insurance you decide to purchase, it is important to shop around because prices are quite different from one company to another. Each uses different tables for “rating” a client based on major health issues, use of alcohol and tobacco, as well as other criteria.

How do you handle your life insurance needs? Are you covered right now or are you waiting for something to change in your life to become insured? What kind of policy do you have and why did you choose it?


  1. My wife and I carry term life insurance today. Our personal goal is to become self-insurance down the line. What I mean by that is continue to build our net worth, where we don’t need to carry the separate policy.

    1. I think that that’s a good plan, Brian. Certainly if you’re in the financial position to self-insure with your assets, no need to spend money on a life insurance policy. Unfortunately, I’m not in that position and I know a lot of other people aren’t either. I hope that people can see that what you’re doing is the better alternative before it’s too late.

    1. You’re absolutely right Brad that most people can manage with term life insurance in the years that they’re using it for a safety net. I didn’t have an adequate term life policy and then I became “hard to insure” because of my health. For me and many others that makes the whole life guaranteed policy one of our few options. I appreciate you comments.

  2. Dan @ Pennies and Dollars

    Other than life insurance salesmen, you’re one of the few pf gurus I’ve heard defend whole life. Thanks for taking a look at the other side of the coin!

  3. Term here. With any insurance you are betting against someone who has studied the odds. If most people “won”, insurance companies would be out of business.

    My husband is 61 and I am 56; our policies are supposed to last another 10 years. At that point the youngest will be out of college, my husband will be on SS and I’ll be close. Our premiums aren’t bad, but they’d be less if we hadn’t had our late-life baby–prior to her we carried half as much insurance and it was supposed to expire this year–my middle child just graduated from college.

    No doubt a check would be nice if one of us died, reality is that unless we are abnormal, investing the difference in the cost of a permanent poicy and a term policy should give us more money in the end than buying the perm policy.

  4. I’m term, but am definitely checking out that conversion article now. I don’t know that I have explored that option before. Now probably isn’t the right time to switch for me, but it is always the right time to be aware of your options.

    1. I made the switch from term to whole life in my sixties, if that gives you any kind of barometer. The primary reasons were a) affordability and b) I had the ability to convert without any medical questions or exams which was a big thing for my wife and me. It’s a personal decisions, FF, but you do have time to look at the options.

  5. We carry term insurance and recently got a 20 year term with the goal that our youngest would be self sufficient by the end of that term. We’re also hoping to have plenty of retirement money to last us should the worst happen at that point. And, of course, we’ll take another look at our insurance needs in another 5 or 10 years.

  6. Prudence Debtfree

    We’re going with term – and there’s a built-in life insurance with my pension. The best strategy really does depend on so many factors that are all unique to each person/couple/family. People have to first step back, learn a bit, and then assess their own situation in light of what they’ve learned – all things that too few of us actually do when we should, unfortunately.

  7. As Dave Ramsey says, buy term and invest the difference. This is great strategy for the majority of families looking for pure life insurance protection. Term life provides the most amount of life insurance at the lowest rate. Also, most good term policies have a conversion option to permanent insurance, without evidence of insurability. However, permanent life insurance, universal life & whole life is important for certain instances such as estate planning, a special needs dependent, need lifetime protection, etc. It’s best to do a needs analysis, compare rates and decide what is best for you, your family and your goals.

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