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Last Updated on: October 6th, 2026
Reviewed by Kyle Wilson
The most expensive life insurance mistake is not picking the wrong company. It is all about picking a policy that does not even match how long your family will need the money. A 20 year term life insurance policy can expire if your spouse still depends on your income and the permanent policy can become unaffordable and lapse fit the premiums strain your budget.
Understanding term vs permanent life insurance will take about 10 minutes and it can protect your family for decades. This guide will explain the difference between the term and whole life insurance plan, what are the cost, cash value in taxes work and how to choose.
Term life insurance covers you for the set time and it can be 10, 20 or 30 years and pays a death benefit only if you die during this time. Permanent life insurance policies such as whole life covers you for your entire life as long as the premiums are paid. It also builds cash value. Term usually cost you less for the same death benefit while the permanent coverage will cause to even more but does not expire for your entire life.
The main difference between term and whole life insurance is duration and cash value. Term life insurance covers a fixed time and it has no saving component. Whole life covers your lifetime and include a cash value that will grow inside the policy.
The NAIC Life Insurance Buyer’s Guide explains that the term life insurance cover for a specific length of time that is called term and most term policies have cash value. It also explains that whole life insurance and universal life are two types of cash value insurance. The NAIC is organization of state insurance regulations so its guide is a neutral starting point.
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The term costs less because you are buying protection only. Whole life costs more because part of the premium funds a cash value and a lifetime guarantee. MoneyGeek’s 2026 life insurance statistics describe term life as offering the highest coverage amount per premium dollar.
You can use the saving component that will build inside the permanent policy overtime. You can borrow against it or surrender the policy for its cash surrender value. If you borrow and do not repay in the unpaid loan can reduce the death benefit.
Surrendering the policy ends your coverage. That is why a whole life plan works best when you plan to keep it for a long time.
When a term policy ends then the coverage will stop. You can often renew it, but the NAIC guide notes that the renewal premiums are generally higher because you are older. Some term life policies include a conversion option that will let you switch to a permanent policy without a new medical exam. Make sure to confirm the conversion deadline in your contract.
Permanent life insurance is a category, and whole life is one type within it. When people compare permanent life insurance vs term, they usually mean whole life, but permanent policies also include several universal life designs.
| Policy type | How it works | Main trade-off |
| Whole life | Fixed premiums, guaranteed death benefit, and guaranteed cash value growth | Higher premiums, less flexibility |
| Universal life | Flexible premiums and adjustable death benefit | Policy can lapse if cash value runs low |
| Indexed universal life | Cash value growth is linked to a market index, with limits | Growth depends on caps and policy terms |
| Variable universal life | Cash value is invested in sub-accounts | Cash value can lose value because of market risk |
Final expense insurance, often called burial insurance, is typically a smaller permanent policy designed to cover funeral and end-of-life costs. A term policy that expires before you die would not pay for those costs. Older adults sometimes choose a small whole life policy for this reason, and the Burial Senior Insurance site is a good place to compare how those smaller policies work.
In general, the death benefit is not taxable income to the beneficiary, whether the policy is term or permanent. The IRS states that life insurance proceeds received as a beneficiary due to the insured person’s death are generally not includable in gross income. Any interest the beneficiary receives is taxable.
There is an exception when a policy is transferred for cash or other valuable consideration. In that case the tax exclusion is limited, according to the same IRS guidance. For details, see IRS Publication 525.
Cash value in a whole life insurance policy rules without annual income tax while it stays inside the policy. If you surrender a policy for cash then IRS guidance says that you must include in income the proceeds that can exceed the cost of the policy. Your cost is generally the premiums that you paid, less certain refunds, rebates, dividends, and unrepaid loans that were not included in your income.
Policy loans and withdrawals can have different tax results depending on how the policy is structured. Ask a licensed tax professional before you take money out of a permanent policy.
Write down three numbers this week: how many years your family would need financial support, how much monthly income they would need to replace, and how much you can comfortably pay in premiums. Those three numbers will make any quote easier to judge.
If you are comparing smaller permanent policies for final expenses, Burial Senior Insurance’s resources explain how burial and final expense coverage works in plain language. For a neutral, regulator-backed overview of policy types, the NAIC Life Insurance Buyer’s Guide is free to read.
Generally, the permanent life insurance is more expensive as compared to term life insurance plans. It can also have fees, complex rules and the lower cash value growth as compared to the other investments.
It can be worth it if you want life long coverage or want to build cash value. The conversion can also be useful if your health has changed and getting a new policy would be very difficult.
There is no single age. You can talk when you no longer need coverage, your dependents are financially secure or your policy will end. Make sure to review your needs before stopping the payments.
Yes, there are so many permanent life insurance policies that have cash value that you can access. You may be able to withdraw the cash value, take a policy loan or surrender the policy. But the taxes, fees and the lower death benefit can apply.
Senior Writer & Licensed Life Insurance Agent
Jazmine Cooke is a dynamic and insightful senior writer with a passion for life insurance and financial planning. With over 8 years of hands-on experience in the insurance industry, Jazmine Cooke has earned a reputation for delivering clear, actionable advice that empowers individuals to make informed decisions about their financial future. At Burial Senior Insurance, she not only excels as a licensed insurance agent but also as a trusted guide who has successfully advised over +1500 clients, helping them navigate the often complex world of life insurance and annuities. Her articles have been featured in top-tier financial publications, making her a respected voice in the industry.
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