Term vs. Whole Life Insurance
Discover the differences between these two types of life insurance coverage.
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Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
Although no one likes to think about it, life insurance can act as a financial safety net for your loved ones when you pass, enable you to make significant posthumous charitable donations, and even help cover expenses while you’re still alive. But when it comes to term versus whole life insurance, which option is best for you?
The primary difference between term and whole life insurance is the duration of coverage. With the former, you’re only covered for a set amount of time. With whole life insurance, your policy is permanent. Benefits are paid out regardless of when you die.
Deciding which option is best for you, however, may be more involved than you think.
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What Is Term Life Insurance?
Term life insurance covers you for a set period (for instance, 20 years) and pays benefits to the person of your choice if you pass away while the policy is active. Your age and health when the term starts may affect its costs and duration. Some policies let you renew term coverage up to a certain age (usually 80).
With term life insurance, you can match your coverage to your length of need. It may be best for someone who only wants protection for a limited time (such as, until your child is financially independent) or who wants a large amount of coverage but has a limited budget.
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What are the Benefits of Term Life Insurance?
Since a term life insurance policy’s protection is time-limited, premiums are generally affordable. You might even get better benefits at a lower cost than you would with a whole life policy. If you get a renewable policy, you can extend your protection for another agreed-upon period of time, even if your health has declined.
Term life policies may be convertible, meaning that you can transform the policy into a whole life option without having to re-prove your insurability. Some policies may even have a “return of premium” feature that allows you to get back some or all of your premiums at the end of the term if you don’t cancel it before the term is up.
What are the Drawbacks of Term Life Insurance
With term life insurance, you’re only covered for a specific time period. Unless your coverage features a return of premium clause, you could also be putting money into a policy that might never pay a benefit.
Premiums may increase significantly if you renew the policy. Some policies may even allow premium increases during the original term.
You may also struggle to find alternative life insurance after the policy has lapsed. If your health has worsened or you’re over 50, life insurance providers might be hesitant to cover you, or the premiums could be much higher.
Pros & Cons of Term Life Insurance
In short, term life insurance has specific benefits and drawbacks.
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What is Whole Life Insurance?
Unlike term life policies, whole or permanent life insurance policies have no expiration date. They’ll pay a benefit no matter when you die, as long as your policy is active. Your premiums may be higher, but they and your benefits stay the same for the lifetime of the policy. Whole life insurance policies also build cash value.
With traditional policies, part of your premium is invested and builds cash equity to help pay your death benefit when you pass, which may make it easier for your loved ones after you’re gone. If you cancel the policy, you’ll get the cash value if it’s over a certain amount. Similarly, universal life policies also build cash value, but can also help cover your premiums to lower your costs.
Variable life policies build cash value through higher-risk investments. Value could build quickly, but if your investments perform poorly, your death benefit package (and its cash value) may decrease. Some variable policies mitigate this risk by guaranteeing a minimum death benefit.
What are the Benefits of Whole Life Insurance?
Whole life insurance policies build tax-deferred cash equity that may act as a savings account, be borrowed against, or help reduce your expenses later in life. These policies don’t lapse or expire (unless you stop paying your premiums), and there are several types, making it easier to match your policy to your needs.
Although they may cost more initially, whole life policies tend to be more cost-effective in the long run. Your premium stays the same for the policy’s duration, and it’s often more affordable in later years than if you’d renewed a term life policy.
What are the Drawbacks of Whole Life Insurance?
The cost of whole life insurance premiums could make it difficult to fit a permanent policy into your budget. Though they do build cash value, you only have access to it if it’s value exceeds a certain amount. Borrowing against your cash equity may also decrease your death benefit if the loan isn’t repaid when you pass.
Pros & Cons of Whole Life Insurance
Whole life insurance has its own benefits and drawbacks, including:
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What Are the Differences between Whole Life and Term Life Insurance?
There are two basic differences between term and whole life insurance: duration and benefits. Term life insurance only offers death benefits and coverage for a set period of time. Whole life insurance has no set duration and offers death benefits and cash equity.
The table below may help you better understand the differences between these policies:
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| Provides death benefits |  |
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| Builds cash equity | |
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| Lasts indefinitely | |
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| Lasts for a limited time | |
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| Simple, straightforward option | |
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| Affordable premiums (early on) | |
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| Affordable premiums (later in policy) | |
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| Usually requires health qualification | |
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| Can sometimes be converted to another policy type | |
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| Can supplement another life insurance policy to provide enhanced coverage | |
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What Is the Cost Difference between Term vs. Whole Life Insurance?
Term insurance may be more affordable initially, but may become unaffordable if you renew the policy at an older age. Whole life policies have higher premiums, but they don’t increase as you age. You may also use cash equity to help cover them.
Whole life insurance policies will typically cost more than term life insurance policies. The cost of both whole life and term life policies can vary depending on a variety of factors such as the individual's age, health, lifestyle, and the amount of coverage.
In short, term life insurance is affordable at first, but quickly grows in cost. Whole life is more expensive up front, but it’s more cost-effective over the long term.
| Person and Age | Coverage Amount | 20-year Term Life Cost/Year | 30-year Term Life Cost/Year | Whole Life Cost/Year |
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| Female, 35, Non-Smoker | $100,000 | $130.20 | $171.96 | $1,242.00 |
| $250,000 | $195.84 | $282.72 | $2,964.00 | |
| $500,000 | $305.16 | $467.52 | $5,874.00 | |
| $750,000 | $421.80 | $665.40 | $8,784.00 | |
| $1,000,000 | $511.20 | $839.40 | $11,568.00 | |
| Male, 35, Non-Smoker | $100,000 | $145.44 | $197.76 | $1,488.00 |
| $250,000 | $221.76 | $330.36 | $2,982.00 | |
| $500,000 | $361.80 | $557.04 | $7,098.00 | |
| $750,000 | $506.88 | $799.68 | $10,626.00 | |
| $1,000,000 | $620.40 | $997.68 | $13,986.00 | |
| Female, 45, Non-Smoker | $100,000 | $196.20 | $284.76 | $1,854.00 |
| $250,000 | $338.28 | $541.08 | $4,494.00 | |
| $500,000 | $571.44 | $958.44 | $8,934.00 | |
| $750,000 | $821.28 | $1,401.72 | $13,380.00 | |
| $1,000,000 | $1,040.28 | $1,783.32 | $17,694.00 | |
| Male, 45, Non-Smoker | $100,000 | $239.64 | $381.24 | $2,316.00 |
| $250,000 | $419.40 | $709.08 | $5,478.00 | |
| $500,000 | $726.48 | $1,260.84 | $12,908.00 | |
| $750,000 | $1,053.72 | $1,819.32 | $16,338.00 | |
| $1,000,000 | $1,355.40 | $2,379.48 | $21,288.00 | |
| Female, 55, Non-Smoker | $100,000 | $378.24 | $718.08 | $2,994.00 |
| $250,000 | $716.28 | $1,404.84 | $7,344.00 | |
| $500,000 | $1,299.72 | $2,537.28 | $14,634.00 | |
| $750,000 | $1,914.24 | $3,770.64 | $21,930.00 | |
| $1,000,000 | $2,486.88 | $4,927.92 | $29,094.00 | |
| Male, 55, Non-Smoker | $100,000 | $515.88 | $993.84 | $3,660.00 |
| $250,000 | $989.52 | $1,978.20 | $8,802.00 | |
| $500,000 | $1,801.44 | $3,687.12 | $17,550.00 | |
| $750,000 | $2,666.88 | $5,495.52 | $14,298.00 | |
| $1,000,000 | $3,397.44 | $7,197.84 | $31,266.00 |
What to Consider before Buying Term or Whole Life Insurance
When choosing between whole life or term life insurance, there are numerous variables to take into account. An independent insurance agent can help you evaluate each of the following aspects of your circumstances and determine whether term life or whole life is a better option for you.
- Your current age
- Current state of your health
- Financial needs of your family
- Plans for funeral and death expenses
- The age of your children
- Long-term health expenses in the event of a serious illness
- Your mortgage and current debts
- When you plan to retire, and the retirement plan you have in place
- Future needs of your family, such as your children’s college tuition
- Your need for an additional retirement savings plan
- Your plans and concerns regarding setting up an estate and ramifications for estate taxes
- Your intention to set up a trust as part of your will
- Whether you want to donate life insurance proceeds to a charity
- Your feelings on potentially paying into a term policy and never receiving any of that value back
Hypothetically, if you are 35 years old, have young children, and are the primary income earner in your household, you might want to consider buying a term life policy that would fully cover your family’s financial obligations.
Calculating your living expenses and debts, and determining your future financial needs can help you to choose the coverage that works best for you and your family. The length of the term would likely depend on the age of your children and when you anticipate them completing college.
Alternatively, you could purchase a whole life policy that will pay face value and would accrue a cash value that would provide additional benefits to your family or act as a growing fund of emergency money.
You could also consider converting portions of your term life policy to whole life insurance over time to build a cash portfolio for your retirement as you age.
If you are just starting to consider life insurance at the age of 60, your children are most likely grown up and on their own, and your needs are likely quite different.
You might want a small term life insurance policy to cover your final expenses, or you might be looking for a term life or whole life policy that could provide for your spouse’s needs if he or she lives on after your passing.
There are many creative and flexible options available for life insurance to meet your unique needs. Only a qualified life insurance professional can help you compare term life vs. whole life and determine which would be the best option for you.
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How to Compare Term Life and Whole Life Side by Side
Now that you have a better picture of the difference between term and whole life policies, you probably want to compare term life versus whole life insurance costs.
To do this, you will need to directly compare the short- and long-term costs of a whole life policy and a term policy, based on factors like your age, the coverage you want, and your health.
You may find that your out-of-pocket costs for whole life insurance seem daunting when compared to term life insurance. This is because the dollars you pay into term life insurance premiums are only there to provide a death benefit to your beneficiaries. Money you invest in whole life insurance premiums builds cash value that you can use later in life or that will add to the death benefit payout.
The percentage of your premiums that goes into your cash accrual account increases over time, as many of the administrative costs associated with setting up the policy and associated investments occur early in the life of the policy.
Who is Term Life Insurance a Good Fit For?
Term life insurance is a good fit if you need a low-cost option or coverage for a set time period. For instance, you may want to consider the age when you expect your kids to be financially independent or if you need to repay a debt if you pass before it’s scheduled to be paid off.
Who is Whole Life Insurance a Good Fit For?
Whole life insurance is a good option if you want permanent coverage or to build cash value as you pay your premiums. It might be a good fit for those who plan to use equity for retirement funds, for instance, or have the budget to cover the premiums and want security for their family throughout their life.
Should You Convert Your Term Life to Whole Life Insurance?
Most term life insurance policies allow you to convert your term policy into a permanent life insurance policy. Is this the right thing to do? Among the reasons it might be a good idea to convert your term policy to a whole policy include:
- Your term life policy is about to expire and you are in your 50s or 60s.
- You want to extend your life insurance coverage, but term insurance may no longer be available or has become very expensive due to your current age.
- You are setting up an estate, or you are concerned about estate taxes.
- You are setting up a trust in your will.
- You need a non-taxable investment option.
Converting term life to whole life insurance can be an excellent way to continue your life insurance policy and also build cash value that you can borrow from.
There are many different ways to structure this type of policy, depending on your needs and goals, so be sure to work with a life insurance professional who can answer all of your questions and help you make the best choices.
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Should You Buy Both Whole Life and Term Life?
You can own both whole life and term life policies at the same time. People who are looking at this option typically already have a whole life policy. However, they may find that they want additional short-term insurance coverage.
In this instance, buying a term policy for that extra protection you need can be a good solution.
Maybe you already own a term policy and find that you want to invest some additional money into a long-term investment for retirement purposes or because of estate issues. In this instance, buying a whole life policy that builds cash value may be the way to go.
Now that you know the differences between term life insurance and whole life insurance, you can make an informed choice to find the best life insurance solution for you and your family. Find out more by contacting an independent insurance agent in your area.
Alternatives to Whole & Term Life Insurance Policies
If traditional term or whole life insurance policies aren’t what you’re looking for, other policy options may fit your needs. They include:
- Guaranteed universal life insurance, which offers affordable permanent life coverage with little to no cash value
- Variable life insurance, which builds value using market-based investments but may experience benefit decreases
- Burial insurance, which features low premiums and low benefits amounts
- Joint life insurance, which covers two people with one death benefit payout
Frequently Asked Questions about Term vs. Whole Life Insurance
Term life is a policy that’s only in effect for a limited time and only offers a death benefit. Whole life can cover you indefinitely and build cash value.
The policy that’s best for you will depend on your situation. Term life may be best if you have a limited budget or only want coverage for a set time period.
Typically, the longest term life policy available covers a 30-year period. A term policy may also offer coverage up to a certain age, like 65.
Unless you opt to renew or convert the policy, your coverage will end and no death benefit will be paid out.
Term life policies don’t build equity, so unless it has a return of premium feature, you won’t receive any cash from the policy.
If you build up enough cash equity in your whole life policy, you should receive that equity if you cancel your coverage. You may also be able to borrow against it or use it to cover your premiums.
Life insurance can help cover your final expenses, help cover your family’s financial needs, or help you make a significant posthumous donation to a charity. However, actual needs will vary by person.
If your special needs dependent is likely to stay a dependent, then whole life insurance will help make sure they’re covered no matter when you pass.
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