Why Is Whole Life Insurance More Expensive Than Term Life?

Whole Life vs. Term Life: What's the Difference?

Permanent life insurance and term life insurance differ mostly in terms of coverage periods, affordability and investment options. Here's a breakdown of these differences:

• Term life insurance: Term life policies cover you for a specific period, usually between one and 30 years. Generally, premiums remain the same throughout the policy's term, and the policy pays a death benefit to your beneficiaries if you die during the covered term. Like other forms of insurance, such as auto or home insurance, term life insurance doesn't include an investment account. In this case, the policy pays out only when you die.
• Whole life insurance: Whole life insurance is the most common type of permanent insurance. It remains in force your whole life, as long as you make your premium payments on time and do not let the policy lapse. Your policy will pay out a death benefit if you die at any point up to age 100.

  Unlike term life insurance, whole life insurance features an investment account called a cash value account. A portion of your monthly premiums are deposited into your cash value account, and the amount grows tax-deferred over time. You can borrow against your balance, withdraw the funds or exchange the cash value to increase the death benefit amount.

Why Whole Life Insurance Costs More Than Term Life

Whole life premiums can range from five to 15 times more expensive than term life premiums. Here are some of the reasons why whole life insurance is more costly.

• Protection for life: Whole life insurance lasts your entire lifetime (or up to age 99, depending on your policy), as long as you keep up with the premiums. By contrast, term life insurance premiums tend to be lower because they only pay out if you die during your term, and there's always a chance you'll outlive your policy.
• Cash value account: Whole life insurance includes a cash value account. The money in this account grows tax-deferred, and you may be able to access the funds while you're still alive.
• Loans against cash value balance: If you have enough funds in your cash value account, your whole life policy may allow you to take out a loan to cover an emergency, pay off credit card debt or any other reason. Any amount you do not repay is deducted from your policy's death benefit.
• Withdrawals for personal use: Your policy may allow you to make tax-free withdrawals from your cash account. But remember, cash withdrawals reduce the death benefit amount your beneficiaries will receive upon your death. Also, if the amount you withdraw is greater than the total contributions you've made into your cash value account, the difference is subject to income taxes.
• Potential for dividends: You may be able to earn dividends from your policy. Mutual insurance companies (companies in which the policyholders mutually own the company) may pay you an annual bonus if their company overperforms financially. In this case, you might receive a dividend as a check or as credit you can use to purchase additional coverage.
• Pay premiums with earnings: Some policies allow you to use your policy's cash value funds to cover your monthly premiums. But be careful not to drain your cash value funds, as it could cause your policy to lapse and you could lose your life insurance coverage.

How Much Does Whole Life Insurance Cost?

The cost of whole life insurance varies by insurer, and factors like age, gender and health come into play. To give you an idea of how much you might expect to pay, here are some sample monthly premium rates based on data compiled by PolicyGenius from 11 different insurers. Rates are calculated for nonsmokers in a preferred health classification, and your rates may vary according to your unique circumstances.

Sample Life Insurance Rates: Term Life vs. Whole Life

What Factors Influence Whole Life Costs?

Your life insurance premiums will be set based on several factors which could affect your life expectancy. The most important factors influencing your premium costs include the following:

• Age: Younger policyholders tend to pay lower premiums because their remaining life expectancy is longer, meaning they'll typically make more payments on the policy before their death. It's generally recommended to purchase life insurance at a younger age to take advantage of more affordable rates. A joint study between Life Insurance Marketing and Research Association (LIMRA) and Life Happens discovered nearly 40% of insured Americans wish they purchased their life insurance policies at a younger age.
• Gender: Women typically pay lower premiums than men for life insurance because their life expectancy is longer. Life expectancy for women is roughly five years longer than for men—82 years and 77 years, respectively—according to the U.S. Census Bureau.
• Health: Healthy people tend to pay less for life insurance since they are less likely to die earlier. When setting your rates, your insurer will likely consider your medical history to see if you have any illnesses. They may also consider your height and weight to help them determine your overall health and the likelihood you could develop a condition that could lower your life expectancy.
• Smoking status: Because smoking can lead to respiratory disease and other health issues, smokers typically pay more for life insurance than nonsmokers. Insurance companies are also likely to set higher premiums if you chew tobacco, vape or smoke cannabis.
• Disability: While the Americans with Disabilities Act (ADA) protects people with disabilities from being denied certain services, life insurance providers may consider factors such as how the disability is managed and its severity.
• Coverage amount: As demonstrated in the table above, the higher the death benefit, the more you can expect to pay for your monthly premiums.
• Credit: Since statistics show that policyholders who manage their financial affairs poorly are more likely to file a claim, some insurance companies use credit-based insurance scores to set your premium rates. Credit-based insurance scores are not the same as traditional credit scores, but they consider many of the same factors such as late payments, outstanding debt and length of credit history.

Is Whole Life Insurance Worth the Cost?

Whole life insurance may make sense for you if you can afford it, especially if you value the predictability of fixed premiums. Consider these pros and cons to determine if whole life insurance may be worth it.

Pros

• Premiums typically remain the same over time.
• Coverage lasts your entire life as long as you keep up with your premiums.
• Whole life insurance pays out a death benefit to your beneficiaries no matter when you die, provided you pay your premiums.
• It includes a cash value account that grows tax-deferred at a guaranteed rate.
• You can borrow or withdraw funds from your cash account.
• Some policies issue annual dividends to policyholders.

Cons

• Premiums are up to 15 times more expensive than term life insurance.
• The rate of return is low compared to other types of investments.
• When you die, your beneficiaries receive the death benefit only. The insurance company absorbs the cash value funds.
• Some policies expire at age 100.
• Money you borrow or withdraw is subtracted from the policy's death benefit.

If you're not sold on whole life insurance, a term life policy may be a more affordable way to leave a death benefit to your loved ones. Bear in mind, it's legal in some states for insurers to consider your credit when setting your premiums, so it's wise practice to check your credit and improve it if necessary before applying for a policy.