What’s the Difference Between Term and Whole Life Insurance?
Term and whole life insurance both have one big goal: to support surviving family members with a death benefit payment if the insured person passes away. Term and whole life also differ in one major way: Term life policies last a set number of years and only pay out if the insured person passes away during that time, whereas whole life never expires, meaning it effectively guarantees a payout.
What’s a death benefit? “Death benefit” is the technical term for a life insurance policy’s overall value. It’s the total amount an insurer would pay out if the insured person were to pass away while covered by their policy. The appropriate death benefit is unique to each person; you can start with an online life insurance calculator for a ballpark estimate of the right policy size for you.
What do term life insurance and whole life insurance have in common?
While there are many differences between term and whole life insurance, the two products have quite a bit in common.
- Guaranteed payouts: Both term life insurance and whole life insurance guarantee a payout of a certain amount of money if you pass while you are covered.
- Monthly premiums: You pay for both policies the same way — with monthly premium payments.
- Premiums stay the same: With both types of insurance, your premiums should stay the same throughout the policy’s duration.
- Insuring companies: You can get a term or whole life insurance from the same companies.
Term Life vs. Whole Life Insurance
|Term Life Insurance||Whole Life Insurance|
|Online quotes available||Yes||No|
|Includes a cash value account||No||Yes|
|Guarantees a payout||No||Yes|
|Includes a death benefit||Yes||Yes|
|Typically costs||$10-$40 per month²||$200-$400 per month or more²|
|Lasts for||Usually 10, 15, or 20 years||Your whole life¹|
|Best for||Almost everybody||People with complex financial portfolios and estate planning needs|
¹As long as the policyholder pays premiums in full throughout the duration of the contract
²For a healthy individual age 25 to 40
Should I Get Term Life or Whole Life Insurance?
It’s widely accepted among financial professionals that term life insurance is the right choice for most people, while whole life insurance works best for those with robust financial portfolios and complex end-of-life considerations. In more concrete terms:
Term life insurance offers affordable financial protection for
- Parents (married or single)
- People with mortgage payments
- People with outstanding debts (student debts, business loans, etc.)
- Anyone whose savings wouldn’t comfortably cover end-of-life expenses, like funeral costs
Main features for term life insurance
- Coverage for a fixed period of time with an end date of coverage
- Pays out a guaranteed amount to the beneficiary when the policyholder passes
- Often can be renewed for a longer-term
- Less expensive premiums than whole life insurance
- Does not hold a cash value
Whole life insurance can be a sound investment for
- People who have maxed out their IRA or 401(k) contributions and need a secondary way to save for retirement
- People looking to set up a tax-free inheritance or trust for younger generations
- Individuals or couples with extensive estate planning needs who might use whole life insurance as an estate management fund with tax benefits
Main features for whole life insurance
- Coverage for as long as premiums are being paid
- Pays out a guaranteed amount to the beneficiary when the policyholder passes
- Can be used for loans prior to death
- More expensive premiums than term life insurance
- Does build a cash value
These examples are by no means the be-all, end-all of life insurance shopping. However, they should give you an idea of where your own situation falls on the term-or-whole-life spectrum. It’s a complicated decision — which is why we’ve included some resources further down the page to help you get started on your search.
Term Life vs. Whole Life Insurance: The Nitty-Gritty
You’ve probably picked up on this already, but our first explanation of term and whole life insurance — that they differ based on the chance of an eventual payout — was the simplified version. A guaranteed or non-guaranteed payout is the defining difference, sure, but from it stem other features that distinguish term and whole life insurance.
For starters: The fact that whole life insurance lasts a lifetime (and guarantees a payout) means that it’s significantly more expensive than term life insurance. You might pay up to 10 times more for a whole life policy than you would for a term life policy with the exact same death benefit.
Whole life insurance is much more expensive than term life insurance– in some cases, up to 10 times more per month.
Of course, it’s worth mentioning that a portion of those hefty whole life premiums will be deposited into an interest-earning “cash value” account. The insured person can invest those funds and even borrow from them later on in life. This is often seen as a way for people to pad their estate or provide an extra safety net for retirement.
Whole life insurance also offers the opportunity to add “policy riders” (extra coverage options) that might benefit the insured during their lifetime. Popular options like an accidental death benefit rider or long term care (LTC) rider let the insured tap into their death benefit to cover costs associated with a critical illness — think medical bills, assisted living costs, and so on.
Whole life insurance adds lifetime value outside the death benefit through vehicles like a cash value account and add-on coverages that pay out during life.
Some riders are available for term life insurance, too. For instance, there are riders that guarantee policy renewal privileges, up the death benefit payout for “accidental death,” extend coverage to family members, and more. However, in general, riders tend to add more value when paired with whole life insurance. This is because whole life insurance lasts so long that people are more likely to encounter situations where they’d really need the extra coverage.
If you’re thinking that whole life insurance sounds pretty decent, you’re not alone. But here’s where the debate comes in: Many experts take a hard stance that it’s best to “buy term and invest the rest” — meaning, spend the $10 to $40 per month on a basic term life policy and put the extra $200 or more that you might have spent on whole life premiums into traditional savings or investment accounts instead. Said experts will argue that this is a much more profitable use of your hard-earned cash in the long run.
Financial planners, agents, and other experts take different stances on whether it’s better to shell out for a whole life policy or “buy term and invest the difference.”
On the other side of the fence are financial professionals who will point out that, first of all, the majority of people aren’t actually “investing the difference,” but simply spending it. This camp also argues that using a whole life cash value account is more stable and reliable over time than choosing to invest in, say, the stock market. Finally, whole life proponents point to the utility of health-related policy riders, which could ease a heavy financial burden if the insured person does develop a serious illness while covered by their whole life policy.
Just remember that all the benefits associated with whole life insurance — from a secure death benefit payment to added lifetime value — only kick in if you keep up with premium payments throughout the duration of the policy. That could mean paying hundreds of dollars per month for decades. (Whole life premiums are locked in when you buy the policy; if you pay $300 the first month, you’ll still be paying $300 in the 240th month).
Remember: Whole life insurance requires you to pay steep monthly premiums for decades. Term life insurance only lasts a set number of years, but that means you only have to pay for it as long as you truly need it.
|Term Life Insurance||Less expensive than whole life insurancePays out a guaranteed amount when the policyholder passesCan be renewedEffective for temporary coverage needs||Does not build cash valueOnly good for a fixed period of timeCan still be expensiveNo access to benefits while you’re alive|
|Whole Life Insurance||Covers you indefinitelyBuilds cash valueCan be used for a loan while you’re aliveCan be customized with other riders for benefits while you’re alive||More expensiveNot good for temporary insurance needsYour needs may changeMay be better investment options|
So, Should I Buy Term Life Insurance and ‘Invest the Rest’?
Ultimately, the decision between term life and whole life insurance comes down to your personal finances. There are a huge number of factors to take into consideration, starting with (but not limited to):
- The number of dependents you have and how old they are at the time you purchase your life insurance policy
- How much you could comfortably afford in premium payments on a monthly basis
- What kinds of debts (education, mortgages, loans, etc.) your family members might be saddled with if you were to pass away
- Where your savings account and retirement funds currently stand (and how they’ll likely look when you actually retire)
- Whether or not you plan to pass down a large estate that could be heavily taxed
It’s a weighty, personal decision, we know — which is why we can’t (and won’t) tell you definitively that either term life or whole life insurance is best for you. On the bright side, the fact that you’re here reading this means that you’re already on the right track. Learning about the different types of life insurance and how they’d fit into your financial plan is a great first step.
Guide to purchasing term and whole life insurance:
- Start by analyzing your needs. Do you only need life insurance for a fixed period of time, or are you looking for coverage for the rest of your life? How many beneficiaries do you have that depend on you financially? Do you have any debt obligations that you want taken care of if you pass? What other financial assets do you have that could help your beneficiaries if you passed?
- Compare the premium costs. Whole life insurance is going to be more expensive than term life insurance. However, the policy will build a cash value, which should factor into the cost equation. How much are you able to pay monthly? Will you be able to maintain the level of payment for the duration of the term?
- Know that you may be able to convert. If you happen to purchase term or whole life insurance and realize that you’re better served with the other option, you may be able to switch. Some insurers give policyholders the ability to switch their policy. Do be aware that often there are time limits on when you can do this.
- If you’re still fuzzy on the differences between term and whole life insurance, do a little more reading up:
- If you’ve got a handle on which type is best for you, you might be ready to start researching companies. We can help you there, too:
Of course, life insurance is a highly complicated, highly personal product — and one with meaningful implications. If you’re not the type of person who can read a few online articles and then make the leap, we don’t blame you.
For a more personalized, guided experience through the life insurance shopping process, we recommend speaking with an independent insurance agent or financial advisor (the key here being “independent”). Look for an expert who isn’t affiliated with any one insurance company; that way, they can help you compare and contrast different policies without pushing you to buy before you’re ready.
The bottom line
When it comes down to comparing term life insurance vs. whole life insurance, it’s quite evident why making the right choice is so important. By taking the time to evaluate your options now, you can set up your loved ones to be taken care of properly when your time comes.
Comparing term life insurance vs. whole life insurance is just the beginning of your options when it comes to insurance protection. There are several other unique products that may be a more applicable fit for your needs.
Universal life insurance is a type of insurance where your premium is split between life insurance costs and savings investments. Indexed universal life insurance policies are a form of whole life insurance that have their value tied to a stock market index. Variable life insurance is another form of life insurance that invests in several sub-accounts, much like a mutual fund.
Before you decide on the type of insurance you want and need, take the time to explore the different options available.
The downside of whole life insurance is that it’s more expensive. The good news is that you are getting expanded coverage in return for the increased premiums. Additionally, whole life insurance might not be a good fit if you only have a temporary need for life insurance. If you only need coverage for something like five or ten years, getting whole life insurance would be drastically overpaying.
The downside of term life insurance is that it only covers you for a specific period of time. Additionally, term life insurance policies do not carry a cash value and are worthless once the insured time period ends. However, in return for these lower levels of coverage, you should be paying much smaller premiums every month.
Deciding how much term life insurance you need starts with an honest and thorough analysis of your financial situation and future goals. Start by determining how long you need coverage for. From there, begin figuring out how much money your beneficiaries will need in your absence. Consider things like lost income, debt, funeral expenses, quality of life and future plans.
Term life insurance is best for people that only need insurance for a set period of time. Determining how long to get term life insurance starts with looking at the reason you need coverage. If you only need coverage for five years, then only get coverage for five years. If you need coverage for a period not offered by the insurer you choose, always opt for a longer policy so that you are 100% covered for your needs. If you’re unsure how long you need coverage for, take more time to assess your future financial goals and work backward.
The answer to this question depends on your unique needs, situation, financial place and goals. While a five year smaller term life insurance policy might be great for one person, it might not be the best option for someone else. Maybe you need a whole life insurance policy for a much larger amount? The answer to what is the best life insurance policy depends heavily on the details of your specific situation.