Life insurance provides financial protection for your loved ones in the event of your death. There are two main types of life insurance—term and whole life. While both offer death benefits, they work very differently. 
This comprehensive guide examines the key differences between term and whole life insurance to help you determine which type may be better for your needs.
What is Term Life Insurance?
Term life insurance provides death benefit coverage for a set period of time, typically 10, 20, or 30 years. It only pays out if you pass away within the term.
Some key features of term life insurance include:
- Purely a Death Benefit: Term policies only provide a death benefit payout. They do not build cash value.
- Lower Cost: Term life premiums are significantly lower compared to whole life insurance since term policies are only in effect for a limited time. Annual premiums are locked in for the length of the term.
- Coverage Flexibility: You can customize your coverage by choosing the death benefit amount, length of the term, and additional riders.
- Guaranteed Renewability: Many term policies allow you to renew up to a certain age without providing additional medical evidence of insurability. This ensures you can maintain coverage as you get older.
Term life insurance is best suited for covering temporary needs like replacing income in the event of your death, paying off a mortgage, or covering child care costs. It offers the most death benefit coverage per premium dollar.
What is Whole Life Insurance?
Whole life insurance provides lifelong death benefit coverage. The policy remains in effect for your entire life as long as you pay the premiums.
Some key features of whole life insurance:
- Lifelong Coverage: Whole life insurance remains in force until you pass away as long as premiums are paid. It does not expire like term insurance.
- Cash Value: Whole life policies build cash value that grows tax-deferred over time. This can be borrowed against or withdrawn.
- Fixed Premiums: Whole life premiums remain level and are guaranteed. However, they are significantly higher than term life premiums.
- Dividends: There is the potential for dividends if the insurance company does well. Dividends can increase the cash value.
Whole life insurance is intended for permanent needs like final expenses or estate planning. The cash value can also supplement retirement income in later years.
Term vs Whole Life Insurance
When choosing between term and whole life insurance, here are some key areas to compare:
Coverage Duration
- Term: Provides temporary coverage ranging from 10 to 30 years.
- Whole: Provides permanent protection for life.
Term life is best for temporary needs. Whole life is better for lifelong coverage.
Premium Cost
- Term: Significantly lower premium cost, around 5-10X cheaper than whole life. Rates increase each renewal period.
- Whole: High premium cost remains fixed. Rates never go up but you pay more upfront.
Term life offers the most affordable protection when you need a high death benefit. Whole life has higher ongoing premium expenses.
Cash Value
- Term: No cash value accumulation. Pure insurance only.
- Whole: Builds cash value that grows tax-deferred.
Term life strictly provides a death benefit to beneficiaries. Whole life’s cash value can be used while living for various financial needs.
Investment Component
- Term: No investment or interest earned.
- Whole: Interest and investment returns allow cash value growth.
Term life is just insurance protection. Whole life insurance policies have an investment component since the cash value earns interest.
Conversion
- Term: Usually convertible to permanent life but costs more.
- Whole: Already a permanent policy so no need to convert.
Those who start with term insurance can usually convert to whole life later without a medical exam if additional permanent coverage is ever needed.
When Term Life Insurance Makes Sense
Here are some scenarios where term life insurance may be the better choice:
Replacing Income Temporarily
If you pass away unexpectedly, term life provides funds your family can rely on to cover income loss for a period of time. It’s an affordable way to protect your loved ones until they transition financially.
Covering Mortgage/Debt
A term policy can provide a death benefit that pays off a mortgage, education expenses, or debts should you pass away early. It offers temporary coverage just for the years you need it.
Family Planning Stages
As you begin having children, term life insurance can provide inexpensive, high coverage during those early family stages that are often the most financially demanding.
Budget-Friendly Coverage
If you need a substantial death benefit but want to minimize costs, term life offers the most coverage per premium dollar. It is very budget-friendly, especially when coverage is just for a certain term.
Supplementing Permanent Insurance
Some purchase smaller whole life policies then supplement with larger term policies. This provides permanent coverage plus higher temporary benefits during key income-earning years.
When Whole Life Insurance Makes More Sense
Here are some situations where whole life insurance may be preferable:
Lifelong Protection
Whole life insurance remains in effect your entire life. It provides lifelong protection that never expires as long as premiums are paid.
Building Cash Value
Whole life policies build cash value that grows tax-deferred over time. This can fund many future needs like supplementing retirement income.
Final Expenses Planning
The death benefit, cash value, and dividend payouts from a whole life policy can cover burial costs, medical bills, debts, and estate taxes to ease the burden on your family.
Charitable Giving
You can use whole life insurance for charitable planning and donations. Some even continue donating the death benefit after passing.
Business Planning
The cash value and death benefit from a whole life insurance policy can assist with business continuation planning, funding a buy-sell agreement, and protecting a business after a partner’s death.
Term vs Whole Life Insurance Cost Comparison
One of the biggest differences between term and whole life insurance lies in the premium cost.
Take a look at how costs for a $500,000 policy could differ for a healthy 30-year-old male non-smoker:
| Policy Type | Annual Premium Cost* |
| 10-Year Term Life | $150-200 |
| 20-Year Term Life | $200-300 |
| 30-Year Term Life | $300-400 |
| Whole Life Insurance | $1,500-2,500+ |
Estimates only. Actual premiums vary by individual factors like age and health.
As the comparison indicates, term life insurance premiums are substantially lower, often around 5-10X cheaper than an equivalent whole life policy.
The term policy only remains in effect for the specified term length (e.g 10 or 20 years in the example above).
The whole life insurance policy would remain in force for the rest of your life as long as premiums continue to be paid.
Which Should You Buy?
So should you get term or whole life insurance? Here are some guidelines:
- If you need high temporary coverage for income replacement or a large debt, choose term life insurance.
- If you want permanent protection plus the ability to build cash value, whole life insurance may be better.
- For limited budgets, term life offers more death benefit per premium dollar.
- If you want to supplement permanent insurance or convert later, start with term life.
- To compare costs and options, always shop policies from multiple insurers.
Many financial experts suggest buying term life insurance for most temporary needs, then supplementing with a smaller whole life policy if permanent coverage is desired. This combo allows you to maximize coverage in a cost-effective manner.
Key Factors That Affect Life Insurance Rates
The rates you pay for term or whole life insurance depend on a number of factors:
Age – Premiums increase as you age. Buying life insurance at a younger age results in lower rates.
Health – Good overall health means lower premiums. Medical conditions or lifestyle factors like smoking can substantially increase rates.
Family History – Any family or genetic conditions may increase your rates.
Occupation – Dangerous jobs often have higher premium costs.
Hobbies – Activities like skydiving are considered high-risk.
Term Length – Longer terms like 20 or 30 years have higher rates than shorter terms like 10 years.
Policy Amount – The death benefit amount affects rates. Higher coverage means higher premiums.
Riders – Additional options like accidental death riders increase rates slightly.
The best way to find affordable rates tailored to your situation is to compare quotes from multiple insurance providers. Be sure to get quotes for both term and whole life insurance to compare costs and find the optimal policy for your budget and needs.
Finding the Best Life Insurance Company
Choosing the life insurance company that offers you the best rates and service comes down to a few key factors:
Reputation – Look for established insurers with positive customer reviews and financial stability ratings. Avoid newer companies with limited track records.
Rates – Compare quotes from at least 3-5 different life insurance providers to find the best rates. Get quotes for both term and whole policies.
Customer Service – Look for responsive customer service and an easy quote/application process. This gives insights into what it’s like working with the insurer.
Online Access – Many leading insurers now offer online account access which makes it simple to manage your policy.
Third-Party Reviews – Consult third-party review sites like JD Power ratings that objectively rate insurers based on financial strength, customer satisfaction, and more.
Here are some of the top life insurance companies based on financial strength, reputation, service, and cost:
- Banner Life
- Protective Life
- Pacific Life
- Principal Financial Group
- Massachusetts Mutual (MassMutual)
- Guardian Life
- North American
- Prudential Financial
- New York Life
Be sure to get quotes from several of these highly-rated insurers before deciding on a life insurance policy.
Frequently Asked Questions
Does term or whole life insurance cost more?
Term life insurance costs significantly less than whole life insurance in almost all cases. Term only provides temporary protection while whole life has lifelong coverage and cash value. The limited duration of term makes it very affordable.
When does whole life insurance make sense?
Whole life insurance makes the most sense when you want permanent coverage plus the ability to build cash value that grows tax-deferred. It also allows you to lock in set premium rates for life. The downside is the high upfront cost.
Can a term life policy be converted to whole life?
Many term life policies allow you convert to a permanent whole life policy down the road without requiring additional medical underwriting. This allows you to get affordable term coverage now, then switch to whole life later if your needs change.
Is a 20 or 30 year term policy better?
20 or 30 year terms allow you to lock in coverage for longer compared to shorter 10 year terms. However, premiums are higher. Choose the longest term that aligns with the duration you need coverage. 20 years is recommended for most needs.
What happens when a term policy expires?
When your term policy expires, coverage ends. You can either renew it for an additional term if available, or apply for a new policy likely at much higher rates. Ensure you don’t lose coverage by monitoring term expirations and planning renewal/replacement accordingly.
The Bottom Line
When it comes to choosing between term and whole life insurance, considering your budget, timeline for needing coverage, desire for cash value accumulation, and other factors outlined in this guide will lead you to the right policy type. Shop multiple insurers to find affordable rates for the coverage you need.
