Term vs Permanent Life Insurance

Term insurance buys a payout for a fixed number of years. Permanent insurance buys a payout whenever it happens, plus a savings component. The price gap between them is mostly explained by certainty.

Last reviewed 2026-08-22

What each one is buying

A term policy pays out if death occurs inside the term and pays nothing otherwise. Most term policies expire without a claim, which is what makes them cheap: the insurer is pricing a probability well under one.

A permanent policy is designed to remain in force for life. If premiums are paid as required, a payout is not a probability but a certainty with unknown timing. The insurer is pricing when, not whether, and that alone accounts for most of the difference in premium.

Where the extra premium goes

A permanent premium is doing three jobs rather than one. It pays for the cost of insurance, which rises with age; it pays the policy's share of expenses and commission; and what remains accumulates as cash value inside the contract.

In the early years the third component is small, because acquisition costs are front-loaded. Cash value typically takes several years to exceed the premiums paid, and a policy surrendered before then returns less than went into it.

A term premium does none of that. It covers the cost of insurance for the year plus expenses, and there is nothing accumulating behind it.

Term: fixed period, no cash value, low premium, expires.
Permanent: lifelong, accumulates cash value, much higher premium.
Early permanent cash values are reduced by front-loaded costs.
Level term premiums are level by design, not because risk is level.
Comparing the two on premium alone compares different products.

Why level term premiums are level

The chance of dying rises every year, so the true annual cost of cover rises too. A twenty-year level term policy averages that rising cost across the term and charges the average.

This means the early years are deliberately overpriced relative to actual risk and the later years underpriced. It also means that cancelling a level term policy halfway through discards the part that was paid for in advance - which is worth knowing before replacing one.

The question that usually settles it

Most cover exists to replace something finite: an income while children are dependent, a mortgage balance, a period of a partner's working life. Those needs end, and a policy matched to them can end too.

Some obligations do not end - a lifelong dependent, an estate liquidity need, a business succession arrangement. Where the need has no expiry date, cover that expires does not address it, and that is the case in which the permanent premium is buying something the term premium cannot.

What decides it is the shape of the obligation, not a general preference for one product over the other.

Frequently asked questions

Why is term insurance so much cheaper?

Because most term policies never pay a claim. Permanent policies are expected to pay one eventually, so the premium has to fund a payout rather than the probability of one.

Is cash value the same as savings?

It accumulates inside the contract under policy terms, with its own charges, surrender conditions and access rules. It behaves differently from an ordinary savings balance and should be read as part of the contract.

What happens when a term policy ends?

Cover stops. Some policies allow renewal at the then-current age-based rate, or conversion to a permanent policy, but those options and their deadlines are stated in the contract.

Can I hold both?

Layering is common - a small permanent policy for an open-ended need and term cover for the years when dependants make the requirement much larger. The arithmetic is just the sum of the two.

Tools that do this maths for you

Everything explained above is available as a working calculator.