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Term and whole life insurance provide financial protection for your loved ones if you die, but the two types of coverage have several key differences.
- Term life has cheaper premiums but doesn't last forever or have a cash value.
- Whole life offers lifetime coverage and has a savings account feature you can tap into while you're alive, but it costs more than a term life policy.
Understanding the benefits and drawbacks of term life and whole life insurance can help you decide which type of coverage is best for you and your family.
| Term vs. Whole Life Insurance | ||
|---|---|---|
| Term Life Insurance | Whole Life Insurance | |
| Duration | 1-30 years | Your lifetime (or 99 years depending on the policy) |
| Cost | Lower cost | Higher cost |
| Cash value | No | Yes |
| Medical exam | Often required | Yes |
| Convertibility | Often | Maybe |
| Loans | No | Yes |
What Is Term Life Insurance?
Term life insurance pays a death benefit to your beneficiaries if you die while the policy is active. Policy lengths, known as terms, typically last from one to 30 years. When the term is up, coverage ends. If you still need coverage, you may be able to renew your policy—though likely at a higher cost—or purchase a new one that better meets your current needs.
Most term life insurance policy premiums stay the same while the policy is active. Less common types of term life coverage let you decide whether to renew your policy each year for the length of the term, with annual price increases. Others reimburse you for part or all of your policy's premium if you're alive at the end of the term, but these plans cost significantly more.
Pros of Term Life Insurance
- Cost: You can purchase a significant amount of coverage at relatively low rates—especially if you're young and healthy.
- Simplicity: Term life insurance has only one component: a death benefit that will not change. If you opt for a level term, your premium stays the same as long as you own the policy.
Cons of Term Life Insurance
- No lifetime protection: Term life insurance coverage ends when the term is up.
- No cash value: Whole life insurance policies have a cash value you can use while you're alive. Term life insurance doesn't—it only has a death benefit.
What Is Whole Life Insurance?
Whole life is a type of permanent life insurance that provides lifetime protection and offers both a death benefit for your beneficiaries and a cash value account you can use while you're alive. Part of your premium goes toward the policy's death benefit, and part is deposited into a savings account that grows tax-deferred at a guaranteed rate.
As your policy's cash value grows, you can withdraw money from it or borrow against it while you're alive. However, cash withdrawals and unpaid loans can reduce the payout your beneficiaries receive after your death.
Pros of Whole Life Insurance
- Lifetime protection: Whole life insurance provides coverage for your lifetime as long as you keep up with your premium payments.
- Cash value: Whole life insurance policies have a cash account you can use to pay your premium or other expenses during your lifetime.
- Dividends: Some whole life insurance policies may pay dividends that can boost your savings even more.
Cons of Whole Life Insurance
- Cost: Whole life insurance can cost six to 10 times more than term life insurance, according to Guardian Life.
- Complexity: The terms and conditions of whole life insurance are typically more complex than term life. It's important to read your policy carefully to understand how it works.
- Cash value: If money is in the policy's cash value account when you die, the insurance company gets to keep it.
Which Is Better, Term or Whole Life Insurance?
There's no one-size-fits-all solution for purchasing life insurance. The type of plan that's best for you depends on your unique circumstances and what you want to achieve with the coverage.
Term life insurance is usually better for younger people with dependents who don't need lifetime financial support. You can purchase a significant amount of coverage at relatively low rates— especially if you have no serious underlying health conditions—giving your loved ones the financial protection they need if something happens to you. Ideally, the expiration date of the policy term will be after your children are grown, self-sufficient and no longer need monetary support.
Since the cash value growth rates in a whole life policy are low—usually around 2% to 4%—you may get more long-term value from purchasing term life insurance and investing the cash you'd save on the premium than using a whole life policy as an investment vehicle.
Whole life may be worth considering for those who have maxed out their tax-advantaged retirement and health savings options and can afford the policy. The tax-deferred growth and guaranteed return may be more appealing compared to riskier options, and the cash value can supplement your retirement income. The policy's lifetime coverage may also be a good option for someone who wants to leave an inheritance for their loved ones or care for dependents with special needs who require lifelong care.
How to Get Life Insurance
Applying and getting approved for life insurance may take several weeks. Here's a brief overview of the process.
- Decide which type of policy is best for you. Before applying for coverage, weigh your options and choose the type of policy you want to buy.
- Determine how much coverage you need. The amount of coverage that's right for you depends on multiple factors, including your income, number of dependents, current living expenses, debt load and future expenses you want your policy to cover.
- Get multiple quotes. Comparing rates from more than one provider can help you get the best possible price. You may be able to get quotes online, or you can work with a broker who can shop around for you and help you compare features and rates from multiple companies.
- Apply. You'll need to provide the insurance company with information about your lifestyle and medical history, including your age, gender, weight, pre-existing health conditions, family health history, occupation and more.
- Get a medical exam. Many life insurance policies require applicants to undergo a medical exam to assess their risk of premature death. If the insurer requires a medical exam, they'll typically send a practitioner to your home.
- Purchase your policy. You'll find out if your application was approved or denied and receive your final rate. You may accept or decline the offer. If you accept, you must make a payment before the policy will be active. Be sure to understand waiting periods and other policy details that may affect the payout your beneficiaries receive, including what can result in a canceled policy.
Learn More >> How to Buy Life Insurance
Frequently Asked Questions
Before buying a policy, it's important to understand how life insurance works. Here are some answers to commonly asked questions.
You no longer have coverage at the end of a term life insurance policy. You may be able to renew your existing policy or purchase a new one, but you should evaluate your need for coverage before you do. Depending on the ages and needs of your children and spouse, the assets you've accumulated and other factors, purchasing additional coverage may not make financial sense.
You can usually convert term life insurance to whole life insurance, but it depends on the insurer. You may have a limited window, and there may be age restrictions for completing a conversion. If you choose to convert your policy, your premium will typically increase.
You may be able to convert your whole life policy to a term life policy, but it's not as straightforward as converting term life insurance to whole life insurance. If you have enough cash value built up in your policy, you can use it to pay your premiums. The policy then converts to term life insurance with a term equal to the number of years for which you paid a premium.
Many states allow insurance companies to check your credit when you apply for a policy. Generally, people with higher credit scores qualify for lower rates than people with lower scores. You can check your credit score for free from Experian to see how it might affect the price you pay for life insurance coverage and determine whether you need to improve your credit.
The Bottom Line
There isn't a single type of life insurance that's right for everyone. To decide on the best plan for you, evaluate your coverage needs, your budget and whether the additional features of whole life are worth the added cost. If you're looking to provide financial protection for your family for a set period of time, term life is likely the better option. But if you want to leave an inheritance to your loved ones (no matter how old they are), build extra savings you can tap into while you're alive and can afford the premium, you may want to consider whole life insurance.