Term life insurance: what to know

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.

Whole life insurance: what to know

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.

Comparing the cost of whole life insurance vs. 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.

How to choose between term and whole life insurance

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: