Term vs. Whole Life Insurance: How to Choose

Term life insurance is easier to understand and costs much less than whole life insurance, but it has an end date.
Andrew MarderApr 29, 2021

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Whole life insurance can give you lifelong coverage and provide extra support during retirement. Term life insurance covers you for a shorter period, but it’s cheaper and simpler. After you’re gone, your family can use the proceeds from either type of policy to cover funeral costs, mortgage payments, college tuition and other expenses.

While the death benefits of whole and term life can be similar, there are key differences between these two popular.

Term life insurance is the easiest to understand and has the lowest prices. It covers you for a fixed period of time, like 10, 20 or 30 years. If you don’t die during the term, your coverage ends and no one receives any money.

Whole life insurance is more complex and tends to cost more than term, but it offers additional benefits. Whole life is the most well known and simplest form of, which covers you until you die. It also provides a cash-value account that you can tap for funds later in life.

Want to know more? Here's a closer look at whole life and term life insurance.

provides coverage for a certain time period. It’s often called "pure life insurance" because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.

You choose the term when you buy the policy. Common terms are 10, 20 and 30 years. With most policies, the payout —  called the death benefit —  and the cost, or premium, stay the same throughout the term.

When you shop for term life:

Ideally, your need for life insurance will end around the time the term life policy expires: Your kids will be on their own, you’ll have paid off your house and you’ll have plenty of money in savings to serve as a financial safety net.

All of the sell term life, so it’s easy to find rates. You can online.

provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly in a tax-deferred account, meaning you won’t pay taxes on its gains while they’re accumulating.

You can borrow money against the account or surrender the policy for cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.

Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:

Some whole life policies can also earn annual dividends, which pay you back with a bit of the insurer’s profit. You can take the dividends in cash, leave them in your account to earn interest or use them to decrease your premium payments, repay policy loans or buy additional coverage. Dividends aren't guaranteed.

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Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.

Below are annual price comparisons between term life and whole life insurance for a $500,000 policy. We used the most common term length, 20 years, because no apples-to-apples comparison is possible for the length of term life to whole life.

Term life is sufficient for most families, but whole life and other forms of permanent coverage can be useful in certain situations.

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.

In addition to the investments they offer, all of these options can also be cheaper than whole life — if the market cooperates. While whole life and term policies have costs set from the beginning, these other options will have varying costs depending on the performance of your cash account and the policy choices you make. That can lead to great savings or to unexpected expenses.

As always, discussing your individual needs with a is a great first step.

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