Term life insurance is more straightforward, flexible, and affordable than whole life insurance, making it a better option for most people.
One of the biggest choices you’ll face when you decide to protect your family with life insurance is picking between term and whole life insurance.
While term life insurance is right for most families, others might benefit from the permanent protection and other features of whole life insurance.
To decide which type of policy is right for you, you need to understand the key differences between the two and consider your coverage needs.
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At its core, life insurance provides your beneficiaries with a lump sum of money if you pass away while the policy is active, in exchange for regular payments.
Both term and whole life insurance offer this basic level of protection.
But how long that protection lasts, what additional features you can expect, and how much you pay for the policy all depend on what type of coverage you choose.
Let’s take a closer look at what term and whole life insurance encompass and the advantages and disadvantages of each:
Term life insurance, called “pure life insurance,” is the simplest type of policy you can buy.
If you die during the length of the policy and your payments are up to date, your beneficiaries will receive the payout. Usually, the size of the policy and the premiums are locked in from day one.
Because term life insurance is temporary, it’s far less expensive than permanent life insurance.
For example, a 30-year-old in average shape could get a $250,000 10-year term policy for less than $20 a month.
Pros of Term Life Insurance
- Cost: Term life insurance is significantly cheaper than whole life. It’s the most cost-effective way to protect your family.
- Flexibility: Term life lets you mold your coverage to temporary needs like paying off student loans, raising your kids, or reaching retirement.
- Simplicity: Term life couldn’t be easier. You don’t have to worry about investment risks or added charges, just pay the premiums.
- Convertibility: At the end of your term, you could switch to a permanent policy with no additional underwriting.
The Drawback of Term Life Insurance
- Temporary protection: The one real drawback is that a term policy doesn’t offer lifelong coverage. If you outlive your term and still need protection, you’ll have to get a new policy.
Whole life insurance takes the basic premise of a term life insurance policy a few steps further.
Unlike a term policy, whole life insurance covers you as long you live, guaranteeing a death benefit to your beneficiaries if you make payments.
In addition to the lifelong guarantee, it comes with the living benefit of cash value, which grows at a guaranteed interest rate.
Cash value is an added bonus if you need permanent protection, but it shouldn’t be the only reason you purchase permanent coverage as there are far more rewarding investment methods.
Pros of Whole Life Insurance
- Cash value structure: This savings vehicle carries many of the benefits associated with a 401(k) or IRA. It accrues interest at a small rate and is tax-deferred.
- Access to savings: You can withdraw from the cash value or take a loan against it.
- Permanent coverage: If you have a special needs dependent or estate that warrants it, lifelong coverage that isn’t at risk of expiring is crucial.
Cons of Whole Life Insurance
- Cost: Premiums are much higher than term life rates because you’re paying into the cash value and a permanent death benefit.
- Low returns: From an investment perspective, the interest rate for whole life insurance is low, and if you aren’t opposed to risk, you could see better returns with a universal policy.
Because term life insurance is temporary and there’s no investment component, it’s far cheaper than whole life insurance.
Let’s take a look at a Preferred health Male at age 35 who is looking to compare each type of coverage:
You could pay 10-15x more for a whole life policy than a term policy of the same death benefit amount.
To put it in a different perspective, you could get double the amount of coverage for a 20-year-term at a much lower cost than a comparable whole life policy.
In most cases, the permanence of whole life insurance isn’t worth the added cost, but it could be if you have long-term needs.
|Length of Coverage||Up to 30 Years||Lifetime|
|Premiums||Temporarily Level||Always Level|
Length of Coverage
Term: 1-30 years
Terms range anywhere from 1 year to 30, typically available in 5-year increments. A select number of companies have created 40 year, but they are uncommon.
Ideally, your financial commitments decrease as you get older, so you can pick a term just long enough to cover your needs.
If your term ends and you still need life insurance, you’ll have to convert your policy or apply for a new one.
Whole life insurance covers you for the rest of your life as long as premiums are up-to-date.
In other words, there’s no chance of outliving your whole life policy and leaving your loved ones unprotected.
Again, one way to secure whole life coverage when you need it and save money in the meantime is to purchase a term policy with a conversion rider.
Term: Level or Annual Renewable
Usually, premium rates for term life insurance are guaranteed level, meaning they won’t go up over the life of the policy.
Annual renewable policies, on the other hand, provide protection for a year, making them ideal for short term expenses.
Though annual renewable policy rates might be lower at first, they climb over time, making coverage more expensive in the long run if you need more than a few years of protection.
Whole life insurance rates are guaranteed level, so you’ll pay the same for coverage whether you’re 19 or 99.
Even if your health drastically declines over the years, you’ll never have to worry about premiums increasing.
When you opt for term life insurance, you can rest assured that the face amount of your policy will not change.
The death benefit is also tax-free, so your loved ones will get every dollar of the policy you paid for.
The same is true of whole life insurance, but with one exception.
If you take out a loan using the policy’s cash value and have yet to pay it back when you pass away, a portion of the death benefit may be used to settle the loan.
Term: No Cash Value
Term life insurance is as simple as it gets. You pay premiums for a term in exchange for a death benefit.
There’s no savings or investing involved, making it easier to understand.
Whole: Guaranteed Cash Value
The cash value of a whole life policy grows at a guaranteed, albeit low, interest rate, which is far less risky, and often less rewarding, than other permanent policy options that fluctuate with the market.
If you decide to forego your policy after a certain amount of time has passed, you may be able to surrender it for the cash value.
Sometimes life’s changes come with unanticipated expenses, like debt, health care, and estate taxes.
When you reach the end of your term policy, you may find yourself in need of more coverage. If your policy is convertible, you can turn it into a whole or universal policy.
To decide whether or not conversion is the right call, you should reassess:
- Your family’s needs: How much coverage do your beneficiaries need? The number will likely be different than when you first applied.
- The cost of coverage: Whole life insurance premiums are far more costly than term life. Figure out what your budget will allow.
- What you qualify for: Depending on your age, you might be eligible for various types of life insurance.
It’s important to weigh the cost of each of your options and your needs to decide whether or not a conversion is your best bet.
Which type of life insurance you should buy depends on your circumstances.
Term life truly is the best option for the majority of life insurance shoppers, especially for:
- Replacing income for your family
- Funding your child’s college education
- Paying the mortgage or other debts
- Protecting your business
On the other hand, if you have permanent needs, like a dependent with special needs or estate taxes, a whole life policy might be worth the added cost.
Regardless, if there are any debts or expenses that would leave your family financially burdened, right down to paying for your funeral, start comparing your life insurance options today.