Life insurance replaces income and pays debts when someone who depends on you dies. In the 2023 Insurance Barometer Study by LIMRA and Life Happens, cited by the Insurance Information Institute, 52 percent of US adults owned life insurance and 41 percent said they did not have enough. The first decision most buyers face is between term coverage and a permanent policy.
Term life insurance
As the NAIC describes it, a term policy pays the named beneficiaries if the insured dies during the term. The term is fixed when you buy, often matched to a need such as a mortgage or the years until children are independent. There is no savings component, which is why term is the least expensive way to buy a large death benefit. Some policies can be renewed, but the premium usually rises with age and renewal may end at a certain age. Many term policies also allow conversion to a permanent policy without new medical underwriting within a set window.
Term fits temporary needs: years when children are at home, the life of a mortgage, or the period until retirement savings can support a surviving spouse.
Permanent (cash value) life insurance
Permanent policies are designed to last for life as long as premiums are paid, and they build cash value you can borrow against or withdraw. The main types:
| Type | Premium | Cash value growth | Key trade-off |
|---|---|---|---|
| Whole life | Fixed | Guaranteed; participating policies may also pay dividends | Most predictable, highest premium |
| Universal life (UL) | Flexible | Credited interest, with a minimum guarantee | Underfunding can make the policy lapse |
| Indexed universal life (IUL) | Flexible | Linked to a market index, subject to caps, participation rates and a floor | Complex; illustrations depend on assumptions |
| Variable universal life (VUL) | Flexible | Invested in subaccounts; can lose value | Market risk; sold as a security |
The NAIC notes that participating whole life policies may pay dividends, which are a partial refund of premium and are not guaranteed.
How cash value works
Part of each premium in a permanent policy goes into cash value, which grows tax-deferred under current federal tax law. You can take policy loans, which accrue interest and reduce the death benefit if not repaid, or surrender the policy for its cash value minus any surrender charges. Early-year cash values are often low because commissions and costs are front-loaded. Overfunding a policy beyond federal limits can turn it into a modified endowment contract, with less favorable tax treatment of loans and withdrawals; ask the insurer to confirm the policy's status.
Indexed universal life: read the illustration carefully
An IUL credits interest based on an index such as the S&P 500, but you are not invested in the market. Credits are limited by a cap and a participation rate, and a floor protects against negative index years. Insurers can usually change caps and rates over time, and policy charges continue in years when the credit is zero. Illustrations show hypothetical results, not guarantees. Ask for an illustration at the guaranteed values and a lower assumed rate before you buy.
Term vs. permanent: side by side
- Cost: term is far cheaper for the same death benefit.
- Duration: term ends; permanent can last for life.
- Cash value: only permanent policies build it.
- Flexibility: UL and IUL allow premium changes; whole life is fixed.
- Complexity: term is simple; IUL and VUL require ongoing monitoring.
Who should consider which
- Term: young families, mortgage holders and anyone whose need ends at a known date. Many advisers suggest buying term and investing the premium difference separately.
- Permanent: lifelong needs such as estate liquidity, a dependent with special needs, funding a buy-sell agreement, or people who have maxed out other tax-advantaged savings and value guarantees.
Buying tips
- Estimate the amount you need: debts, years of income, education and final expenses.
- Compare several insurers' quotes and financial strength ratings.
- Pay premiums to the insurance company, not to the agent, as the NAIC advises.
- Use the free-look period set by your state to review the delivered policy.
- Review coverage every few years and after marriage, a birth or a new mortgage.
If a life insurer fails, state guaranty associations provide a safety net; NOLHGA says most protect at least $300,000 in death benefits and $100,000 in cash surrender values per insurer.
Estimate your coverage with the life insurance calculator, see our life insurance page, or request quotes. For retirement income, read annuities explained.