Term vs. Whole Life Insurance: Which Is Right for Me?

The key differences between whole and term life insurance policies are cost, how premiums change, length of policy, cash value and customizability.

Term life insurance is the simplest form of life insurance, with no value beyond the death benefit. It only provides coverage for a set time period, known as the term, and has no cash value. In many cases, the term is defined as a certain number of years. For instance, a policy might have a 20-year term or a 30-year term. Other policies last until the insured reaches a specified age, often 65. Few companies will sell term policies that stretch past the applicant’s 80th birthday.

The biggest benefit of term life insurance is its affordability. Term life insurance premiums will be much lower than those for an equivalent whole life policy. As with other types of insurance, your rates will be based on factors such as age, health and lifestyle. Rates will also vary depending on certain policy features. Here are a few examples:

• Renewable term: You can renew this policy past its original expiration date without undergoing a new medical exam. However, your premium will be recalculated each time you renew to account for your higher age.
• Convertible term: This policy allows you to convert your term life insurance to whole life insurance. Your new premiums will be higher based on your age and the upgrade to permanent coverage, but most companies will not require updated health information.
• Return of premium: Premiums for this type of policy could be several times higher than other term policies. However, in exchange for the higher rate, you are guaranteed a refund if you outlive the policy term.
• Decreasing term: With a decreasing term, your death benefit will decrease incrementally throughout your policy’s life. Your premiums will remain the same but likely be lower than they would be with a level term policy, and you probably will not need a medical exam.
• Guaranteed issue: This type of policy does not require a medical exam. You only need to answer a few simple health and lifestyle questions, and approval is guaranteed. However, the insurance company will likely charge higher rates to account for the inherent risk of guaranteed approval.

Mortgage, credit, group and supplemental life insurance policies also fall into the category of term life insurance. For these policies, the term is tied to a condition, such as your employment or an outstanding loan, rather than a specific age or number of years.

Read more: Best term life insurance policies

Pros of Term Life Insurance

• Price: Term life insurance is the most affordable type of life insurance. It may be a good fit if you only need coverage for a specified period or have no interest in building cash value within a life insurance policy.

• Flexibility: The policy term can range anywhere from five to 30 years. You can also renew your policy at the end of your term, but your premiums will increase.

• Suitable for specific needs: You can get a term policy to help your loved ones meet temporary financial obligations, such as paying for your funeral or paying off your mortgage.

• Convertibility: If your circumstances change, you can convert your term life policy into permanent life insurance. Generally, insurers do not require you to undergo another medical exam when converting a policy.

Whole life insurance provides coverage for your entire life. A whole life policy may lapse if you fail to pay your premiums, but it will never expire. As a result, the payout is guaranteed. Many policies have a defined maturity date, though, which is typically the policy anniversary nearest your 100th birthday. If you live past that date, the insurance company will pay out the full cash value of the policy.

The cash value component is another key benefit of whole life insurance. A portion of every premium payment goes toward building the cash value of the policy, which functions similarly to a tax-deferred savings account. Once the cash value reaches a certain amount, you can access it through a policy loan or withdrawal. However, taking advantage of these options may reduce your death benefit.

Cost is the biggest downside of whole life insurance. Although whole life premiums do not fluctuate over time, your age affects how they are calculated. The younger you are when you purchase whole life insurance, the more affordable the premiums will be. Still, you can expect whole life insurance to be more expensive than term life insurance, as companies must charge enough to cover the higher cost of a lifelong policy.

You can enhance your whole life insurance by choosing a policy with certain features or riders. Here are a few examples:

• Limited payment: With this type of policy, you pay the entire cost of the plan within a limited number of years rather than paying premiums for the rest of your life. This allows you to enjoy premium-free life insurance during your later years.
• Modified premium: This policy allows you to make lower payments for the first few years, but you will pay higher premiums later to make up for it. You might choose this option if you need to keep costs low now but expect a sizable increase in your income within five to 10 years.
• Single premium: If you can afford to pay a hefty amount up-front, this type of policy may be for you. Rather than paying monthly or annual premiums over a period of time, you pay for the entire policy with a single lump-sum payment. The more you pay, the higher your death benefit will be.
• Participating policy: Participating policies pay dividends during years when the insurance company earns more than it needs to cover policy costs. The IRS does not consider these dividends taxable income. Non-participating policies do not pay dividends.
• Waiver of premium: This rider kicks in if you become disabled and can no longer work. In that case, the insurance company will waive your premiums, allowing your policy to remain in effect despite your inability to make premium payments.
• Accelerated death benefit: This rider allows you to access a portion of your policy’s death benefit while you are still alive, but only in certain circumstances. Its purpose is to help you cover medical costs if you are diagnosed with a chronic or terminal illness. Some policies include this rider at no additional charge.
• Term life rider: Adding this rider allows you to increase your death benefit by purchasing a supplemental term life policy. Since term coverage is generally more affordable, this option could be cheaper than increasing the face value of your whole life policy.
• Guaranteed purchase option: With this rider, you can purchase additional whole life insurance without undergoing a medical exam. This allows you to increase your death benefit regardless of your current health, though you may only be allowed to make changes at predetermined times.

Note that waiver of premium and accelerated death benefit riders may also be available for term policies. Not all companies offer every option mentioned above, and some may offer options that are not listed.

Pros of Whole Life Insurance

• Permanent coverage: A whole life policy will provide a death benefit no matter when you pass away, as long as you’ve paid your premiums.

• Cash value component: A portion of your premium is allocated to your policy’s cash value, which builds over time. You can borrow against this cash value or withdraw from it.

• Tax savings: Your policy’s cash value builds on a tax-deferred basis, potentially providing meaningful tax savings.

• Dividends: Depending on your chosen policy, you may receive dividends, which you can use to lower your premiums, increase the death benefit or take as cash.

Term life insurance policies are generally more affordable than whole life plans. The shorter the term, the greater the price difference. If you do not need or cannot afford permanent life insurance, you can consider a term life policy. If the initial quotes you receive are out of your budget, you can adjust the coverage amount and term length to lower your premiums.

Whether you choose term or whole life insurance, your age will impact your premiums. Purchasing a whole life policy locks in your rate for the rest of your life. A term life insurance policy expires at the end of your term, usually 10, 20 or 30 years, leaving you with the option to renew coverage or let the policy lapse and apply for a new one. Either way, your life insurance rate will increase based on your age.

Besides cost, the biggest differences between term and whole life insurance are the coverage length and cash value component. Term life policies provide temporary coverage for a specified period, expiring when the term ends. Whole life policies, as with all permanent plans, provide lifelong coverage. Whole life insurance also has a cash value component you can withdraw from or borrow against while still alive. For example, you can use your cash value accumulation as a safety net for large, unexpected expenses, such as medical bills.

However, not everyone needs permanent life insurance coverage. Term life insurance may be a better option if you are seeking more affordable coverage or have savings or other accounts for unexpected expenses or retirement. If you have questions about which type of life insurance is right for you, we recommend consulting a financial advisor.

It is important to note that standard term and whole life insurance are not your only options. You can also choose from several other types of permanent life insurance, as well as a few special types of term life insurance.

Mortgage Life Insurance

Mortgage life insurance is a decreasing term policy that covers the remaining balance of your mortgage. It expires once your mortgage is paid off, and the premiums are generally wrapped into your regular mortgage payments. Any death benefit is paid directly to your mortgage lender rather than your family. 

Credit life insurance, which follows the same rules, is available for other types of loans.

Final Expense Life Insurance

Final expense life insurance is the most affordable type of permanent life insurance because of its relatively low death benefit. Also known as burial or funeral insurance, it is only meant to cover expenses billed to your family or estate, such as your funeral costs.

Universal Life Insurance

Universal life insurance allows policyholders to adjust their death benefits and premiums over time, within limits. Rather than setting a fixed growth rate, universal life policies only guarantee a minimum interest rate. Your actual rate of return will rise or fall based on market conditions but will not dip below the minimum.

Variable Life Insurance

With whole or universal life insurance, the insurance company makes all the investment decisions and shoulders most, if not all, of the risk. Variable life insurance is different because it allows the policyholder to choose their investments. Good investments will grow the cash value more quickly, while poor investments could leave you with higher premiums or a lower death benefit.

The choice between term or permanent life insurance comes down to your personal situation — namely, what you need and what you can afford. Whole life insurance provides permanent coverage and, eventually, a tax-advantaged source of funds thanks to its cash value component. Term life insurance, meanwhile, is the more affordable option. Although it only offers temporary coverage, you can choose from a wide range of coverage terms.

Before making your decision, you may want to discuss your long-term goals with a financial advisor or estate planning attorney. You should also take the time to shop around. Companies vary in how they calculate risk or weigh certain factors, which means two companies could quote vastly different rates for the same coverage.

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