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The difference between term and whole life insurance can be boiled down to cost and length. Term life insurance is cheap when compared to whole life. It covers you for a set period of time and pays out if you die during the term. Whole life insurance typically lasts your entire life and has a savings component known as the “cash value,” which makes it a more complex and expensive product.
With either policy, your loved ones can spend the payout — called the death benefit — on a variety of costs, such as funeral expenses, mortgage payments, college tuition and more. But depending on your coverage needs, one type of life insurance may be a better fit than the other.
Term vs. whole life: Overview
To better understand the difference between term life and whole life, here’s a quick rundown on how each type of coverage works.
What is term life?
The way term life insurance works is simple: It covers you for a fixed period of time, such as 10, 20 or 30 years, and pays out if you die during the term. If you outlive the term and your coverage ends, your beneficiaries don’t receive any money. With most policies, the death benefit and your insurance premiums are guaranteed to stay the same throughout the term.
Ideally, the length of your term life insurance should match the financial obligation you’re covering. For example, if you're a new parent, you might buy a 20-year policy to cover you until your child no longer relies on you financially. All of the best life insurance companies sell term life, so it’s easy to find and compare life insurance quotes online.
What is whole life?
Whole life insurance is the most common type of permanent life insurance and costs more than term life. This is because most policies offer coverage that’s designed to last a lifetime and pay out regardless of when you die. Whole life insurance also has a cash value component. A portion of your premiums are paid into the account, and it grows over time. Once you’ve built up enough cash value, you can borrow against the account or surrender the policy for cash.
Although it’s more complicated than term life, the way whole life insurance works is more straightforward than other types of permanent life insurance. Premiums remain the same for as long as you live and the cash value account grows at a fixed rate. The death benefit is also guaranteed, unless you take out large cash value loans. While you don’t need to repay loans if you borrow against your policy, your insurer will subtract any outstanding loans from the final death benefit paid out to your beneficiaries.
Most whole life insurance policies are “participating” policies, which means you may earn dividends based on the company’s financial performance. You can use your dividends in a few different ways — including boosting your policy’s cash value.
Term vs. whole life: Policy features
Choice of policy length
Accumulates cash value
Provides lifelong coverage
Premiums typically stay the same
Might be eligible for annual dividends
Life insurance payout amount is guaranteed
Term vs. whole life: Cost
Term life coverage is often the most affordable life insurance because it’s temporary and has no cash value. Whole life insurance premiums are much higher because the coverage lasts your lifetime, and the policy grows cash value. Here’s how much annual premiums compare for a $500,000 policy of term life insurance vs. whole life.
20-year term life
30-year term life
Average of three lowest prices available in each category for healthy men and women. Source: Quotacy. Age is at time of issuance. Premiums stay level throughout the length of the policy.
How to choose between term and whole life insurance
Term life is sufficient for most families, but whole life and other forms of permanent coverage can be useful in certain situations.
Choose term life if you:
Only want life insurance to cover you for a specific period of time. A term life policy can replace your income if you die while you still have major financial obligations, such as raising children or paying off your mortgage.
Want the most affordable coverage. Term life insurance is the least expensive option, especially if you’re young and healthy.
Think you might want permanent life insurance but can’t afford it right now. Many term life policies can be converted to permanent coverage. The deadline for conversion varies by policy.
Don’t want to use life insurance as an investment vehicle. Buying a cheaper term life policy lets you save what you would have paid for a whole life policy, and perhaps invest the money elsewhere.
Choose whole life if you:
Can comfortably afford the higher premiums. Whole life insurance is a lifelong commitment, so you want to make sure you can afford it. If you miss your premium payments, your policy could lapse.
Want to leave money for your heirs. The death benefit from whole life policies can potentially be used as an inheritance. If you name life insurance beneficiaries on your policy, the payout will go directly to them and not through your estate.
Have a lifelong dependent like a child with disabilities. Life insurance can fund a trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor before setting up a trust.
Want life insurance that builds guaranteed cash value. The cash value of whole life policies grows at a guaranteed rate set by the insurer.
Other life insurance options
If you need lifelong coverage but want more investing options in your life insurance than whole life provides, consider other types of permanent life insurance.
Universal life insurance earns interest based on current market rates.
Variable life insurance or variable universal life insurance both give you access to direct investment in the stock market.
Indexed universal life insurance earns interest based on stock indexes like the S&P 500.
While the premiums you pay for whole life and term policies are typically set from the beginning, these other options often have varying costs depending on the performance of your cash-value account and the type of coverage you buy. That can lead to great savings or to unexpected expenses.
As always, discussing your individual needs with a fee-only life insurance consultant is a great first step.