The battle over term versus permanent life insurance need not be a battle—there are appropriate uses for both of them. BUT, permanent life insurance is likely over-sold because of the handsome commissions received by selling agents.
The reason permanent life insurance products seem expensive is because they are. A few years ago, I purchased a new $1 million 20-year term life insurance policy with a premium of under $500 per year. I knew permanent life insurance was more expensive, but I was curious how much more expensive, so I quoted comparable whole life, universal life and variable life policies. The variable and universal policies were ten times the amount of premium and the whole life was twenty times the term premium! (Please note the difference in premiums will vary for each person, depending on age and health.)
But what is the difference between term and permanent life insurance? Regarding term life insurance, you pay an insurance company to transfer the risk that you will die during the stated term of the policy. If you have a 20-year term policy, your premiums are guaranteed to stay the same for twenty years, and if you die during the 20 year period, the insurance company pays the death benefit to your named beneficiaries. Typically, by the end of the term your need for life insurance is gone.
Permanent life insurance is substantially more expensive for two reasons: First, while term policies are primarily created to last only for a finite period of time that will likely end before you die, permanent polices are often designed to exist until you actually leave this earth. This dramatic increase in the likelihood that the insurance company will be responsible to pay a death benefit means they need to charge more in premiums. Second, permanent policies often have a tax-privileged savings component attached to the policy, so a portion of your premium is set aside to accrue for your future use.
But the “investment” feature in a permanent life policy is rarely as effective or efficient as several others, like your 401k, IRA or Roth IRA, so fill those buckets first. You should also not consider permanent life insurance until you have substantial emergency reserves, all revolving debt paid off, education fully funded and money in the bank for large future purchases. Permanent life insurance can be a valuable tool for a relative few, but unless you have income of over $250,000 annually or over $1 million in assets, your life insurance needs are likely best met with term life insurance.