Why permanent life insurance isn’t right for most people

For people seeking financial security in case of an untimely death, there are two main types of life insurance: term and permanent. The truth is, 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 most buyers end up with a permanent policy. The 2020 Insurance Barometer Study by LIMRA, a life insurance trade group, found 51 percent of policyholders have permanent coverage only, while 33 percent have term coverage only.

If you’re looking into a plan for yourself, don’t get swayed by those numbers. Term life insurance, particularly for young, healthy people, is more affordable and less complex than permanent life insurance.

There are some situations where permanent life insurance is the right choice. But those cases are few compared with the typical need for life insurance.

Comparing the options: Term vs. permanent life insurance

If people in your life would suffer financially if you suddenly died, life insurance is a worthy investment. The death benefit that insurers pay out upon your death can cover debts, replace your lost income or help pay for your children’s education.

There are various types of both term and permanent life insurance, but the broad strokes of the two main buckets are as follows:

• Term life insurance covers a set number of years. Once the plan expires, so does your death benefit, so this policy pays out only if you die while your plan is active.
• Permanent life insurance lasts for the rest of your life. These policies also typically act as an investment vehicle — as you pay your premium, your plan accrues a “cash value” that you can borrow against or pull money out of.

Permanent life insurance: pros and cons

Permanent life insurance is your best option if the money from it will be needed no matter when you die. 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 10 to 18 times more than 20-year term coverage for a healthy applicant buying a $500,000 policy, a comparison of average life insurance rates shows.

The higher price means you may not be able to afford enough permanent coverage to meet your family’s needs. And 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 investment component. And while your policy may build cash value, insurance can be an expensive way to save for retirement. The cost of the insurance is a drag on your investment performance, so you should consider other options first.

“It’s especially important for young people to take advantage of IRAs, Roths and traditional 401(k)s,” says James Hunt, a life insurance actuary who advises the Consumer Federation of America. “Don’t buy whole life insurance unless you have plenty left over after maxing out your IRAs.”

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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 term life insurance compelling: It can cover you for the years you need it, and then you can reassess.

The lower cost of term life is always a benefit, but it’s especially important in volatile times such as a recession or pandemic, when you could 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, according to Jeff Root, founder of Rootfin, an insurance agency based in Austin, Texas.

With this option, “you can access the death benefit while you’re still alive and pay out if you have a cancer, heart attack, stroke or other qualifying events,” Root said in an email.

The point is for your policy not to pay out

If you outlive your term life insurance policy, that’s a good thing. As Root noted, “the goal is for term life insurance NOT to pay out — you don’t want to die early.”

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

Eric Goldschein is an insurance writer at NerdWallet. Email: egoldschein@nerdwallet.com Read more