Term Life vs. Whole Life Insurance (Cost, Pros and Cons)

Term life insurance provides coverage for a fixed term at a lower price but with no cash value component. Whole life insurance covers the policyholder's entire life at a higher premium but comes with a cash value component that accumulates over time.

• Level term life insurance: Fixed death benefit and premium for a set term of 10, 20 or 30 years. A practical fit for buyers who want predictable coverage at a consistent cost.
• Decreasing term life insurance: The death benefit decreases over the term, aligned with a mortgage or loan balance. Premiums stay level. A practical fit for homeowners who want coverage tied to a mortgage payoff schedule.
• Annual renewable term life insurance: Renews each year with premiums that increase as the insured ages. A practical fit for short-term or temporary coverage needs.
• Convertible term life insurance: Can be converted from term to whole life without a new medical exam.

• Traditional whole life insurance: Fixed premiums, a set death benefit and steady cash value growth. A practical fit for buyers who want simplicity and guaranteed growth.
• Variable whole life insurance: Cash value is invested in sub-accounts similar to mutual funds. Suitable for buyers who are comfortable with investment risk in exchange for higher growth potential.
• Single-premium whole life insurance: The full premium is paid upfront in exchange for a guaranteed death benefit and immediate cash value accumulation.
• Limited payment whole life insurance: Premiums are paid over a fixed period with lifetime coverage remaining in place.

Whole life costs more than term life insurance, and the difference increases as you get older. The table below compares average monthly rates based on quotes we collected for $500,000 term and whole life policies. Term pricing reflects policies with a 20-year term.

* Rates shown are averages for nonsmokers of average height, weight and health.

Benefits of term life insurance:

• Lower cost: Term life costs less than whole life because coverage is temporary and no cash value accumulates.
• Fixed death benefit: Pays a set amount to beneficiaries if the policyholder dies during the term.
• Level premiums: Premiums stay the same for the life of the policy.
• Rider eligibility: Term policies qualify for riders, though available options vary by insurer.

Benefits of whole life insurance:

• Lifetime coverage: Whole life covers the policyholder for life as long as premiums are paid.
• Cash value: Whole life policies build cash value the policyholder can borrow against or withdraw at any time. Growth is tax-deferred.
• Guaranteed death benefit: Pays regardless of when the policyholder dies.
• Fixed premiums: Premiums stay the same for the life of the policy.
• Dividend eligibility: Policyholders at mutual insurers may receive dividends when the company turns a profit. Dividends aren't guaranteed.
• Estate planning utility: Whole life doesn't expire, so it can anchor an estate plan in ways term life can't.

Drawbacks of term life insurance:

• Limited duration: Coverage ends when the term does. Renewing or buying a new policy costs more as you age.
• No cash value: Pays only a death benefit with no savings or investment component.
• Premiums increase at renewal: Applies to annual renewable term policies.
• Fewer options: Fewer riders and coverage adjustment options than whole life.

Drawbacks of whole life insurance:

• Higher cost: Whole life premiums are five to 15 times higher than comparable term coverage. A 35-year-old buying $500,000 in whole life pays roughly $505 more a month than for a comparable term policy. This means over $121,000 more in premiums over 20 years, not counting what that money could have earned if invested.
• Lower investment returns: Cash value growth is typically slower than market returns on comparable investments like index funds.
• Rigid payment schedule: A missed premium can reduce the death benefit or lapse the policy.
• Cash value stays with the insurer at death: Accumulated cash value not withdrawn or borrowed before death goes to the insurer. Beneficiaries receive only the death benefit.

For most people, term life is the smarter financial move, but there are some cases where whole life makes sense.

Choose term life if you:

• Want the most affordable coverage
• Only need coverage for a specific period, such as until your mortgage is paid off or your children are financially independent
• Are the primary income earner for a young family on a tight budget
• Don't need a savings or investment component built into your policy
• Want to invest the premium difference elsewhere on your own terms

Choose whole life if you:

• Need coverage that lasts your entire life, regardless of when you die
• Have a lifelong dependent, such as a child with a disability, who will require financial support after you're gone
• Want to use life insurance as part of an estate plan to fund a trust, leave an inheritance, or pass assets to the next generation
• Have maxed out tax-advantaged retirement accounts and want an additional tax-deferred savings vehicle
• Can comfortably afford premiums five to 15 times higher than a comparable term policy for the rest of your life

"Buy term and invest the rest" means buying a lower-cost term policy for death benefit coverage and putting the premium savings into a 401(k), IRA or index fund. Term premiums are substantially lower than whole life, and market-linked investments have historically outpaced the fixed returns on whole life cash value. For disciplined investors who consistently invest the difference, this approach can build more wealth than a whole life policy's cash value component over time.

The strategy has real limitations. It requires consistent follow-through over many years, and the savings often get spent rather than invested. It also doesn't account for the risk of becoming uninsurable when term coverage expires or the effect of a market downturn near the end of the policy term. Whole life's guaranteed premiums, guaranteed cash value growth and permanent coverage are worth the higher cost for buyers who value certainty over potential upside.

Life insurance needs change, and switching policies is more common than most people think. Here's how each direction works.

• Switching from term to whole life: A convertible term policy allows the switch without a new medical exam. This is a common path for buyers whose needs have become permanent.
• Switching from whole to term life: The switch lowers premiums but forfeits accumulated cash value. It makes sense when obligations have decreased — children grown, mortgage nearly paid off, no remaining need for permanent coverage. Any surrender value above the premiums paid in may be taxable. Consult a tax professional before making the change.
• Laddering policies: Some buyers pair a permanent whole life base with one or more term layers on top. The whole life policy covers lifelong needs. A 20-year term layer covers a larger temporary need like a mortgage or income replacement during peak earning years. As each term layer expires, total coverage decreases in line with shrinking obligations. The whole life base stays in place.