Term Life vs. Whole Life Insurance: Key Differences and How To Choose

Term and whole life insurance have three key differences: cost, policy length and cash value. Term life insurance is cheaper, lasts for a set period of time and doesn’t have a cash value. Whole life insurance is more expensive, but it’s permanent and builds up cash value over time.

» MORE: Best life insurance companies

Term life vs. whole life insurance: Overview

To better understand the difference between term life and whole life, here’s a quick rundown on how each type of coverage works.

Term life insurance

Term life insurance 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 won’t receive any money from the policy.

Most life insurance companies sell term life, so it’s easy to find and compare life insurance quotes online.

Most policies are level term life, so the death benefit and life insurance premiums stay the same throughout the term. Decreasing term life policies with death benefits that get smaller over the length of the term are less common.

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.

» MORE: What is term life insurance?

Whole life insurance

Whole life insurance is the most common type of permanent life insurance and typically costs more than term life. This is because most policies offer coverage that lasts until much later in life, such as until 100 or 120 years old.

Premiums for whole life insurance remain level, and the cash value grows at a guaranteed fixed rate. The death benefit is guaranteed, too.

Whole life insurance also has a cash value component. A portion of your premium goes toward the cash value, which grows over time at a fixed rate. Once you’ve built up enough cash value, you can borrow against it or surrender the policy for cash — but doing so could shrink or eliminate your death benefit.

Many whole life policies are “participating,” which means you may earn dividends based on the financial performance of the mutual life insurance company that sold the policy. You can use your dividends in a few different ways — including boosting your policy’s cash value.

» MORE: What is whole life insurance?

Cost of whole life insurance vs. term life insurance

Cost is a major difference between whole and term life insurance:

• Term life is often the most affordable life insurance because it’s temporary and has no cash value.

• Whole life premiums are much higher because the coverage typically lasts your lifetime, and the policy grows cash value.

Here’s how annual premiums compare for term life vs. whole life.

Average annual rates for term life vs. whole life

These sample rates reflect the average annual premiums a non-smoker in excellent health would pay for $500,000 in coverage for both term and whole life policies.

How to choose between term and whole life insurance

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

Choose term life if you:

• Want the most affordable coverage. Term life insurance is the least expensive option, especially if you’re young and healthy.

• Only want coverage 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.

• Think you might want permanent life insurance but can’t afford it right now. You may be able to convert your term life policy to permanent coverage at a later date. The deadline for conversion varies by policy, and not all policies offer conversion.

• Don’t want to use life insurance to accumulate a cash value. 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 coverage that essentially lasts your lifetime. The death benefit from whole life policies typically pays out whenever you die. 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.

» MORE: Is whole life a good investment?

Still not sure whether you need life insurance? Use our tool below.

Alternatives to term and whole life insurance

If you need lifelong coverage but want more flexibility than whole life provides, consider other types of permanent life insurance:

• Universal life insurance.

• Variable life insurance or variable universal life insurance.

• Indexed universal life insurance.

These other options often have varying costs and features depending on the type of coverage you buy and the performance of your cash value. 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.