Term vs. Whole Life Insurance: Differences, Pros, and Cons

Term life insurance is cheaper than whole life insurance, but it covers you for only a set number of years.

The difference between term life insurance and whole life insurance is in their prices and how long they cover. Term life is cheaper than whole life because it covers only a set period of time. Whole life Insurance lasts for the majority of your lifetime, and a savings component known as the “cash value” makes it more complex, giving it a higher premium.

Life insurance provides a payout to your loved ones in the event of your death. With both traditional and comprehensive coverage, some policies offer more benefits than others. Your needs will help you decide which type is more appropriate for your specific situation.

Term vs. Whole Life: Overview

We’re about to compare term life and whole life insurance, so let’s quickly look at how each covers you.

What is the term life?

Term life insurance pays out if you die during your term. If the term is exceeded, any money paid out will be used to pay for accrued interest or taxes for the policyholder. Term life insurance policies typically have the option to add a rider that will cover the beneficiary after the death of the policyholder.

In order to identify the best term life insurance quote, it’s important to evaluate your financial obligations and find a policy that matches those needs. For example, if you’re looking for cover until your child isn’t financially reliant on you anymore, you might want to aim for a quote of about 20 years. All of the best life insurance companies can be found online with a quick search.

What is a whole life?

Whole life insurance is the most common type of permanent life insurance and costs more than term life. This is because it offers coverage with a guaranteed payout, even if you die soon after purchasing the policy. Whole life also has a cash value component built into it. Payment of premiums will build up money in the account and allow you to borrow against it or get your money back in cash once you’ve built up enough money in the account.

With whole life insurance, premiums stay the same for as long as you live, and the cash value account grows according to a fixed interest rate. The death benefit is also guaranteed, but if you take out cash loans against your policy, your insurer will subtract them from your final death benefit payout to your beneficiaries. It is a more straightforward type of permanent life insurance than term life insurance with fewer rules, but it does have its complexities.

Most whole life insurance policies are participating policies, which means you may earn dividends based on the company’s performance. You can use your dividends in a few different ways, including boosting your policy’s cash value.

Term vs. whole life: Cost

Term life insurance is the most affordable type of life insurance. It has no cash value and the policy ends when you die or the time period is over. Whole life insurance premiums are much higher because they last your lifetime and they have a growing cash value. With this table, you’ll be able to compare annual premiums for a $500,000 term life vs. whole.

How to choose between term and whole life insurance

Whether you choose a term life insurance policy or other forms of permanent insurance, your family should be covered in a way that works for their specific needs.

Choose term life insurance if you:

Want life insurance, but don’t want it to cover you for the rest of your life? Term life insurance policies let you select how long the coverage will last and replace your income if you die while still paying off major financial obligations.
Looking for affordable coverage? Term life insurance is the most inexpensive option for people who are young and healthy.
If you’re thinking about making the switch from term life to permanent coverage, speak with your insurance company to make sure you’re in a position to do so. The deadline can vary by policy, so be sure to know what’s right for you!
Why not use life insurance as an investment vehicle? Purchasing a cheaper term life policy will allow you to save what you would have paid for a whole life policy, and invest it elsewhere.

Choose your whole life if you:

Whole life insurance is a lifelong commitment, so you have to be sure you can afford it. If you miss your premium payments, the coverage will lapse and your policy could be canceled.
If you want to leave money for your heirs whilst in a healthier state, consider changing life insurance beneficiaries on your policy. You may be able to name them your primary payout beneficiary so that the payoff will go directly through them and not through your estate.
Have a dependent who is a member of your family, like children or elderly relatives? If you want to provide for their financial stability and future, life insurance can help fund a trust that will provide for care. Check with an attorney and financial advisor before setting up the trust.
The great thing about whole-life policies is that they provide guaranteed growth, providing your family and loved ones with money to help them in the future.

Other life insurance options

If you need life insurance that will cover you for your whole life but have other investment options, consider some other types of permanent life insurance products.

Universal life insurance pays you interest based on current market rates.
You can choose from two mutually exclusive options; variable life insurance or variable universal life insurance. If you’re looking for access to the stock market, these are both acceptable options for you.
Indexed universal life insurance pays out at an income that depends on how well the company has performed.

Whole life and term policies have set premiums, but cash-value policies can cost more or less depending on the performance of your cash-value account and the type of coverage you purchase. You might save a little or actually incur a surprising expense.

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Frequently Asked Questions

What happens to term life insurance at the end of the term?

Most term life insurance policies come with expiration dates, but there are instances where insurance may continue. For example, you may convert to permanent life insurance before your insurers’ deadline. This can increase the rates you pay, so be sure these are worth it to you.

What are the downsides of a whole life insurance policy?

Whole life insurance offers higher coverage and a cash value component. If the policyholder dies without making any withdrawals, the insurer keeps those funds.

Can you cash out a term life insurance policy?

Term life insurance policies don’t offer any cash value, but permanent life insurance does. If you want a policy that will build in value over time, consider purchasing a permanent policy.