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Term Life vs. Whole Life Insurance: The Main Differences Between the Two
By Victor Rosario MONEY RESEARCH COLLECTIVE
Life insurance is an important part of your financial planning, and having an insurance plan can help your loved ones pay for your final expenses and be financially protected after your death.
Many of the best life insurance companies offer several types of life insurance, including term and permanent life insurance. Each type of policy differs in its premiums, coverage amounts and cash value components.
Ready to purchase life insurance but don’t know if a term or whole life insurance policy is the better fit for you? Read this guide to learn more about your life insurance options.
Table of Contents
- What is term life insurance?
- What is whole life insurance?
- How does term vs whole life insurance work?
- Differences between term and whole life insurance
- Things to consider before buying term or whole life insurance
- Which one should you get?
- Term vs whole life insurance FAQs
- Summary of our guide to term vs whole life insurance
What is term life insurance?
A term life insurance policy expires after a number of years. For example, purchasing a policy with a 30-year term and level premiums means your policy will cover you for 30 years and your premium payments will remain the same for that set period of time. If you pass away during that period, a death benefit will be paid to your beneficiaries.
Insurance companies can deny your term insurance claims for various reasons, including if the policyholder dies during the contestability period, which can last up to two years after you purchase the policy. During this time, the company reserves the right to review your life insurance coverage before it makes a payout.
At the end of your policy term, some life insurance companies provide you the option to renew the policy without having to undergo a medical exam. Renewing your policy also gives you an opportunity to raise your death benefit, although the company can always deny your request to renew or opt to increase your insurance rates.
- Tends to be less expensive than whole life insurance
- Can usually be transitioned into a whole life policy
- Premiums can rise after the initial term expires
- Does not include a cash value component
What is whole life insurance?
Whole life insurance is a type of permanent life insurance which remains in effect for the entire life of the insured person, as long as the policy remains in good standing.
Whole life policies have two components: a tax-free guaranteed death benefit and a savings account called the cash value. As you pay your insurance premium, a portion of the money goes into your cash value account, from which you can make withdrawals during your lifetime.
Unlike with other forms of permanent life insurance, such as variable life or universal life insurance, this cash value is guaranteed and continues to grow over the long term.
- Policies in good standing never expire
- Includes a cash value component
- Is not renegotiable
- Tends to be more expensive than term life insurance
Differences between term and whole life insurance
| Term life insurance | Whole life insurance | |
| Policy duration | The term is set, such as 20-year term | Lifelong coverage while in good standing |
| Benefits | Lower premiums; often renegotiable; provides coverage only as long as needed | Cash value account grows, can be borrowed from |
Things to consider before buying term or whole life insurance
Life insurance is a valuable option for those who want to leave a safety net for their financial dependents, have their funeral expenses covered or leave the cash value of a policy to help in repaying unsecured debts.
The best time to purchase a life insurance policy is as soon as possible. The longer you wait, the higher your premiums will be, as a rule, and the greater the risk of suffering a health setback that could raise premium rates, reduce your maximum death benefit or even result in a policy denial.
In addition to the applicant’s age and health, life insurance costs depend mainly on the policy type and the amount of coverage you seek. To figure out how much life insurance you need, you should consider the following factors:
- Gender: Men have a lower life expectancy than women, and because of it, life insurance companies tend to charge higher monthly premiums to men
- Age: Life insurance companies see age as a risk, and so older individuals pay higher premiums
- Health: Pre-existing conditions such as diabetes, cancer, or heart conditions will make it difficult to obtain approval for a policy and result in more expensive premiums.
- Lifestyle: Life-threatening hobbies such as skydiving or rock climbing make you a higher risk
- Weight: Life insurance companies may charge more for individuals with a higher BMI
- Cigarette use: Smokers are more likely to develop significant health issues and will always pay a higher rate than non-smokers
Which type of life insurance should I get?
When is it better to get term life insurance?
A term life policy is a good option if you:
- Value affordability above other policy attributes: Since term life policies don’t have a cash value component, and so lapse at the end of their term, they tend to be more affordable than permanent policies
- Need coverage only for a certain time period: For example, if you have a mortgage, it would make sense to have the life of the policy match the life of your home loan.
- Are interested in a whole life policy but cannot afford it right now: Many life insurance companies offer to convert term life clients to whole life coverage when their term policy expires. By purchasing a convertible term policy now, you can convert your policy to whole life when you can afford to.
When is it better to get whole life insurance?
A whole life policy is a good option if you:
- Value the length of coverage and peace of mind: A whole life policy lapses only if its premiums aren’t paid
- Can afford higher premiums: Because of the cash value component of coverage, whole life premiums tend to be higher than those of a term life policy
- Desire insurance with an investment component: The cash value component can provide a desirable investment opportunity to those who have maxed out their contributions to an IRA or 401(k) plan. Policyholders can also take out loans from the policy’s investment account
Term vs. whole life insurance FAQs
How do I buy term or whole life insurance?
You can request a free quote through a life insurance company's website or contact a life insurance agent or broker by phone or online to begin the process.
When is the right age to buy term or whole life insurance?
If you're looking to get a life insurance policy, you should get one as soon as possible, as age and health are big factors when deciding your premiums.
How much life insurance should I get?
This depends on what you want the insurance to cover. Some policies only cover final expenses, while others include a cash value to the policyholder's beneficiaries.
What are the alternatives to term or whole life insurance?
Universal life insurance offers more flexibility than a whole life policy. That's because policyholders are able to change their death benefit and premium payment amounts at any point without surrendering the policy.
Summary to our guide to term vs whole life insurance
All in all, which life insurance policy is the best choice for you depends on the stage of life you’re in, and what you want to insure based on your financial needs. While term life insurance offers lorates, whole life might be better to those looking for an investment they can borrow against.
Check our selection of the best life insurance companies to learn more about our top picks and their offerings.
