What's the difference between term life insurance and whole life insurance? In this article, you'll learn the features of each policy type and other considerations so that you may be better prepared to make an informed choice based on your unique needs. Below, find benefits and features of both types of policies, starting with term life.
What is term life insurance?
A basic term life policy offers:
- The flexibility to select the length of the policy term that you desire
- A more affordable option compared to whole life insurance
- A level premium and death benefit for the length of the term
- The option of renewing coverage when your term ends (typically resulting in a higher premium and possibly a reduced face amount) 1
Term life insurance can be one way to balance affordability with future financial security. Under current tax laws, it provides a tax-free death benefit to your beneficiaries. Your family could use funds for funeral expenses, income replacement, children's education and debt payoff in the event of your passing.
With term life insurance, you select a policy length, typically 10 to 30 years. This can be effective if you want financial protection during a certain period of your life, such as while your children are young and financially dependent on the household income.
Your premiums stay the same throughout the term, allowing for easier budgeting. Term policies are usually less expensive than whole life policies, but typically they don't build cash value over time. You may have the option to renew your coverage once the term has ended, but that typically will trigger a significant premium increase. At that point, you may have the option to convert it into a whole life policy, depending on the type of term life policy you have.
What is whole life insurance?
A basic whole life policy offers:
- Coverage for your whole life (as long as premiums are timely made, your policy will not expire)
- Level premiums that won’t increase
- A guaranteed death benefit that won’t decrease (unless cash value has been withdrawn and not repaid at time of death)
- The potential to build cash value over time
- The living benefit of cash value. Any cash value that may accumulate in your policy can be withdrawn or borrowed against and used for any purpose (important note: any partial withdrawals or outstanding loans that aren’t paid back will reduce your policy’s death benefit)
Whole life insurance is permanent, meaning you're covered for your lifetime, as long as you make the required payments on time. It provides a death benefit along with cash value. Depending on the policy terms, you may be able to access your cash value through loans or allow it to grow tax-advantaged at a fixed interest rate over time. It's important to note that loans accrue interest and can reduce the death benefit if they remain outstanding at the time of the insured's death. Whole life insurance rates are more expensive than term life policies. The cash value can grow over the long term. This can make whole life policies an appealing option for certain estate planning strategies.
If you surrender your whole life policy you may be entitled to a portion of the cash value. However, this "surrender value" will take into consideration any outstanding loans, premium payments, and surrender charges. Your premiums stay level, meaning they will not increase or decrease during your lifetime.
What's the difference between term vs. whole life insurance?
Term life insurance provides coverage for a specified period of time at a lower cost, while whole life insurance offers lifelong coverage with cash value accumulation and guarantees. The choice between the two will depend on your individual needs, budget, and financial goals. Learn about some of the differences in term and whole life below.
Policy length – While term life provides coverage for a specific term (e.g. 10, 20 or 30 years), whole life coverage spans the entire life of the insured.
Cash value – Term life policies do not accumulate cash value, whereas whole life policies build cash value over time.
Premiums – Premiums for term life are typically lower for younger individuals, but may increase upon renewal. Premiums on whole life policies remain level throughout the life of the policy.
Dividends – Term policies do not pay dividends. Some whole life policies may pay dividends, depending on the insurance company.
Cost – Generally, the cost of term life is more affordable compared to whole life insurance. The cost for whole life policies is higher but policies can build cash value that can be borrowed or withdrawn, reducing the death benefit.
Which is better: term life or whole life insurance?
The difference between term life and whole life insurance depends on your unique financial situation, goals, and preferences. There is no one-size-fits-all answer, so it’s essential to carefully evaluate your options and choose the policy that aligns best with your needs and objectives.
A knowledgeable insurance agent can help you pick a policy that suits your goals and circumstances. But generally speaking, term life insurance may be appropriate if:
- You have a temporary need for life insurance.
- You need a large amount of coverage for a few years or decades where your need outpaces income.
- You want to cover your family's financial obligations if you pass away early.
You may consider whole life insurance if:
- You have a permanent need for life insurance.
- You are purchasing for estate planning purposes.
- You have a health concern that could make it harder to get coverage later in life.
Why is whole life insurance more expensive?
As you're evaluating the expenses of whole life vs term life, you'll notice rates for whole life insurance are higher. It's because whole life policies are designed to last longer (your entire lifetime, instead of a specified term) and carry more administrative costs.
Term life insurance is generally less expensive because it lasts for a limited time period and has no cash value.
Comparing the cost of term vs. whole life insurance
It is difficult to do an objective comparison of term and whole life policies. While they are both designed to pay a death benefit to your beneficiary(ies), they function very differently in some ways. In general, you will pay more for a whole life insurance policy than you will for a term policy, but the choice needs to be based on what benefits/features are most important to you.
If cost is the primary factor, a term policy is likely to win over a whole life policy. It is important to evaluate the features and functions of different types of policies and determine which best meets your needs.
Choosing the right life insurance policy for you
There are a handful of factors to consider when choosing between term or whole life insurance, including:
- Your age
- The age of your children and spouse
- Your family's financial needs (child care, tuition, student loans, etc.)
- Health expenses
- Mortgage and other debts
- Your retirement assets
When you're shopping for life insurance, it's important to weigh multiple factors and focus on your personal needs and circumstances. Term life insurance and whole life insurance both have pros and cons. Now that you understand the differences, you can make an informed choice that's right for you.
1 Not all term policies include this option. Check with your agent or company representative for specifics regarding your policy’s terms and conditions.
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