How to use the term vs permanent life insurance cost comparison
- Enter how many years to compare, from 1 to 60.
- Enter the yearly premium of the term policy and how many years the term lasts, then the yearly premium of the permanent policy.
- Enter a growth rate for investing the difference and the permanent policy's cash value at the end, taken from its illustration.
- Read which path ends with more money, the premiums paid on each, and the year-by-year table of the invested saving.
Formula
each year: difference = permanent premium - term premium (the full permanent premium after the term ends)
invested saving at year end = (previous saving + difference) x (1 + growth rate)
result = invested saving at the end - permanent cash value at the end
Premiums are assumed to be paid at the start of each year, so each year's difference earns the growth rate for that whole year. The page requires the permanent premium to be at least the term premium, so the difference is never negative.
Thirty years with a 20 year term
A term policy costs $900 a year for 20 years and a permanent policy costs $6,000 a year for all 30. The term path pays $18,000 in premiums and the permanent path pays $180,000. If each year's difference is invested at 4 percent, the invested saving after 30 years is $308,712.23. The permanent policy's illustration shows a cash value of $190,000, so the term-and-invest path ends $118,712.23 ahead in cash.
With no growth at all, the saving is only $162,000 and the permanent path is ahead by $28,000. The growth rate you assume decides which side wins, which is why the page lets you change it.
What this compares and what it does not
The comparison counts only money. Term cover ends when the term ends, while permanent cover can continue for life, and this page does not put a value on the death benefit in the years after the term. It also ignores taxes, loans against the policy, surrender charges, dividends and changes in premium.
Because of that, the result is not a recommendation to buy one product or drop another. It shows the size of the gap that a growth assumption must close. To estimate how much cover you might need in the first place, use the Life Insurance Needs Calculator.
Why the growth rate matters so much
A difference of a few thousand dollars a year, invested for decades, is very sensitive to the rate. Try zero, a conservative rate and an optimistic one, and see how the answer changes. The Compound Interest Calculator shows how a level saving grows at different rates.
The cash value you enter is also an assumption. Illustrations often show a guaranteed value and a projected one, and they differ. Enter the one you are comparing against.
Assumptions and limits
- Premiums are level for the years shown and paid at the start of each year. Real premiums can change.
- The saving earns the same growth rate every year with no taxes or fees.
- The cash value is a figure you enter. The page does not calculate it or check it against an insurer's tables.
- The death benefit and the value of cover after the term are not part of the comparison.
- This is an illustration of cash paths only, and nothing typed here leaves your browser.
Frequently asked questions
Does this say which policy to buy?
No. It compares two cash paths on assumptions you choose. The policies also differ in what they cover and for how long, which a cash comparison cannot capture.
Why must the permanent premium be at least the term premium?
The method invests the cheaper policy's saving. If the premiums were reversed, the saving would belong to the other side, and the page would need to swap the roles. Enter the lower premium as the term premium.
What cash value should I enter?
Use the value shown for the last year in the policy illustration. If it lists a guaranteed and a non-guaranteed column, try both, since they can differ a lot.
What happens after the term ends?
In this model the term premium becomes zero, so the whole permanent premium is invested each year from then on. The term path then has no cover, and the page notes the number of those years.