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The Differences Between Term and Whole Life Insurance

Term life insurance is easier to understand and costs much less than whole life insurance, but it has an end date.
Insurance, Life Insurance
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Amid the COVID-19 pandemic, not all companies are accepting new life insurance applications. For the latest information on how to cope with financial stress during this emergency, see NerdWallet’s financial guide to COVID-19.

Buying life insurance now provides a financial safety net for your dependents later if you’re not around to take care of them. After you’re gone, your family can use the proceeds to cover funeral costs, mortgage payments, college tuition and other expenses.

There are two main types of life insurance:

Term life insurance is the easiest to understand and has the lowest prices. You can get life insurance quotes online.

Permanent 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 permanent life insurance. Other kinds of permanent life insurance include universal, variable and variable universal.

Want to know more? Let’s take a closer look at term life insurance versus whole life insurance.

Term life insurance explained

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 or 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:

  • Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early.
  • Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.

Ideally, your family’s need for life insurance will end around the time the term 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 best life insurance companies sell term life, so it’s easy to find rates.

» MORE: Compare life insurance quotes

Whole life insurance explained

Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly, tax-deferred, 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 the 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.

Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component.

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

  • The premium remains the same for as long as you live
  • The death benefit is guaranteed
  • The cash value account grows at a guaranteed rate

Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.

» MORE: How to find the best whole life insurance policy

Term vs. whole life: policy features

Policy features Term life insurance Whole life insurance
Choice of policy length
Provides lifelong coverage
Premium generally stays the same
Low premium
Life insurance payout amount is guaranteed
Accumulates cash value
Might be eligible for annual dividends

Term vs. whole life: cost comparison

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. We used 20-year and 30-year term life policies because no apples-to-apples comparison is possible for the length of term life to whole life.

2020 average life insurance rates

Person coveredPolicy amountWhole life30-year term life20-year term life
Annual premiums using an average of three lowest prices available in each category for healthy men and women. Source: Quotacy.
Male, age 30$250,000$2,145$223$150
$1 million$8,380$647$373
Female, 30$250,000$1,904$191$133
$1 million$7,417$525$299
Male, age 40$250,000$3,191$340$210
$1 million$12,563$1,115$593
Female, 40$250,000$2,766$280$180
$1 million$10,867$893$501
Male, age 50$250,000$4,990$811$465
$1 million$19,763$2,913$1,604
Female, 50$250,000$4,262$616$364
$1 million$16,850$2,132$1,162

Term vs. whole life: which to choose

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

Choose term life if you:Choose whole life if you:
  • Only need life insurance to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage.

  • Want the most affordable coverage.

  • Think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.

    • Want to provide money for your heirs to pay estate taxes. In 2020, estates worth more than $11.58 million per individual or $23.16 million per couple are subject to federal estate taxes. State estate taxes vary. Here’s a map of state estate and inheritance taxes from the Tax Foundation.

    • Have heirs who might be forced to sell off parts of your estate to pay the tax bill without an insurance payout.

    • Have a lifelong dependent, such as a child with special needs. Life insurance can fund a special needs trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor if you want to set up a trust.

    • Want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs.

    • Want to equalize inheritances. If you plan to leave a business or property to one child, whole life insurance could compensate your other children.

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