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Term vs. Whole Life Insurance: Which to Choose?

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Updated: Nov 7, 2023
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Choosing the right type of life insurance can be a challenging decision, as it involves weighing the benefits and costs of different options. Two popular types of life insurance policies are whole life insurance and term life insurance. While both provide financial protection to loved ones in the event of the policyholder's death, they differ in terms of cost and benefits. Comparing whole life insurance and term life insurance and highlighting the key differences between the two can help you make an informed decision about which type of policy may be right for you.

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What Is the Difference Between Term and Whole Life Insurance?

Life insurance policies come in two major categories - term life insurance and whole life insurance. Term life insurance provides coverage for a fixed term at a lower price, but with no cash value component. In contrast, whole life insurance provides coverage for the policyholder's entire life at a higher premium but comes with a cash value component that accumulates over time.

Term life insurance is favored by those who need coverage for a specific period of time, such as when they have dependents who rely on their income. Whole life insurance may be preferred by those who want lifetime coverage and are willing to pay a higher premium. Whole life insurance may be suitable for those who wish to use the cash value component for financial goals, such as paying for a child's college education or supplementing retirement income. Ultimately, the decision between term and whole life insurance depends on an individual's financial goals and needs.

Types of Term Life Insurance

There are several types of term life insurance to consider, each with different requirements.

  • Level Term Life Insurance: This type provides a fixed death benefit and premium for a specified term, usually 10, 20 or 30 years. It's ideal for those seeking consistent coverage and payments.

  • Decreasing Term Life Insurance: With this type, the death benefit decreases over the term, often in line with a mortgage or loan. The premiums usually remain level, making it suitable for covering diminishing financial obligations.

  • Annual Renewable Term Life Insurance: This policy renews annually with increasing premiums as the insured ages. It offers short-term flexibility and can be a good fit for temporary coverage needs.

  • Convertible Term Life Insurance: Convertible policies allow the insured to convert the term policy into a whole life policy without a medical exam. It provides flexibility for those who may want permanent coverage in the future.

Types of Whole Life Insurance

There are different types of whole life insurance to meet various needs, and providing a stable and long-term financial solution.

  • Traditional Whole Life Insurance: This standard form offers guaranteed premiums, death benefits and cash value growth. It can be a solid choice if you want predictability and lifelong coverage.

  • Variable Whole Life Insurance: With this policy, the cash value is invested in sub-accounts, similar to mutual funds. It offers growth potential but comes with higher risk. It may be suitable if you want an investment component within your life insurance.

  • Single-Premium Whole Life Insurance: A single-premium policy allows you to pay the entire premium upfront, securing a guaranteed death benefit and immediate cash value accumulation. It's ideal for those who have the means to pay the premium in one lump sum and want to simplify their financial planning.

  • Limited Payment Whole Life Insurance: This type allows you to pay premiums over a specified period, such as 10 or 20 years, while still providing lifetime coverage. It's designed for those who prefer to complete their premium payments earlier in life.

Cost of Term Life Insurance vs. Whole Life Insurance

There can be a substantial cost difference between term and whole life insurance. Whole life usually costs more than term life insurance. Several factors contribute to the cost of both policies. Understanding these factors can help you make an informed decision that aligns with your financial goals and needs.

  • Type of Policy: Term life insurance covers a specific period, while whole life offers permanent coverage, leading to higher premiums for the latter.

  • Age of the Insured: Premiums tend to increase with age, especially in term policies that may be renewed.

  • Health Condition: Underwriting considers health factors; pre-existing conditions can elevate costs.

  • Coverage Amount: The chosen death benefit amount directly impacts the premium.

  • Riders and Additional Features: Optional add-ons can enhance coverage but also increase the price.

  • Investment Components: Whole life policies often include investment features, adding to the cost.

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Benefits of Term Life Insurance vs. Whole Life Insurance

By comparing the benefits of term and whole life insurance, you can make an informed decision that matches your financial responsibilities. Whether seeking temporary protection with term life or a lifelong safety net with whole life, understanding these benefits will help you choose the right policy.

Benefits of Term Life Insurance

  • Affordable Coverage: Term life insurance offers cost-effective coverage for a specific period, usually from 10 to 30 years.

  • Set Death Benefit: Provides a set death benefit paid out if the policyholder passes away during the policy term.

  • Stable Premiums: Term life premiums remain the same for the policy length.

  • Rider Eligibility: Term policies are eligible for riders, though options vary by policy type and company.

Benefits of Whole Life Insurance

  • Lifetime Coverage: Whole life insurance provides coverage for the policyholder's entire lifetime.

  • Cash Value Component: Accumulates cash value over time that the policyholder may access during their lifetime, by borrowing against or withdrawal. This component typically grows tax-deferred.

  • Guaranteed Death Benefit: Offers a typically higher and guaranteed death benefit for the policyholder's entire lifetime.

  • Fixed Premiums: Whole life premiums stay the same for the policy's life.

  • Dividend Eligibility: Can earn dividends if with a mutual company that earns profits.

  • Estate Planning Utility: Whole life can be part of an estate planning strategy, unlike term life, which has an expiration date.

Drawbacks of Term Life vs. Whole Life Insurance

Both term and whole life insurance have distinct advantages, but they also come with potential drawbacks. Understanding these limitations and weighing them against the benefits can help you select the policy that best aligns with your needs and long-term goals.

Potential Drawbacks of Term Life Insurance

  • Limited Coverage Duration: Term life insurance only covers a specific period, leaving no protection once the term ends.

  • No Cash Value: Unlike whole life, term life does not accumulate any cash value, offering only a death benefit.

  • Increasing Premiums: Some term policies may have premiums that increase with age or at renewal, leading to higher costs over time.

  • Lack of Flexibility: Term life policies often have fewer options for customization or adjustments to coverage.

Potential Drawbacks of Whole Life Insurance

  • Higher Costs: Whole life insurance premiums are higher than term life.

  • Limited Investment Returns: The cash value component may offer lower returns compared to other investment options.

  • Inflexibility in Premium Payments: Whole life requires consistent premium payments, which may not suit those with fluctuating income.

Should You Get Term or Whole Life Insurance?

You may be asking yourself, should I buy term or whole life? The answer will depend on your needs. For many people, term life insurance is better because the premiums are lower than those for whole life insurance, and you can invest the cost difference between term and whole life insurance.

With the right investment strategy, you can earn more than the cash value account could grow with a fixed interest rate. However,whole life may be better than term life in certain situations.

Why Term Life Insurance Is Better in Most Cases

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    Your dependents will eventually grow up

    Whether you’re the sole breadwinner or both parents work, many parents get life insurance to cover the costs of raising a child, should one spouse die early. Term life can provide the safety net you need at a fraction of the price of whole life insurance. While whole life may sound like a great choice, but your children will grow up and be independent, possibly eliminating the need for the death benefit.

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    You can just invest on your own

    Free investment into a savings account with a guaranteed interest rate is a selling point for whole life insurance. But if you were to invest the cost difference between term and whole life, you could potentially earn higher returns than the modest interest rate of a whole life policy.

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    You can afford a larger death benefit

    If you’re young, starting a family, own a home and have debts like car or student loans, the death benefit you need can be substantial. Buying term life versus whole life insurance means you can afford a much larger death benefit for the years you need it. Once your needs are met, the policy can expire and free up the premium you were paying for something else.

  • bigHouseRent icon

    Debts will eventually be paid off

    Debts only last for so long, even a 30-year mortgage. Term life is a good choice if you want to provide for debts in case of death before they are paid. Once you’ve paid them off, there’s no longer a life insurance need to cover them.

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    It covers your prime income-earning years

    If you want to use life insurance as income replacement for your survivors, term life can cover your prime income-earning years at a much cheaper rate than whole life. The closer you get to retirement, the less life insurance you need to replace your income, making term a better option than whole life.

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    It can be converted to permanent life insurance

    With some term policies, you get the option to convert some or all of the death benefit to a permanent life policy. You can take advantage of the cheaper rates for the bulk of your death benefit with a term policy; then convert what you need to permanent life insurance when your financial needs are lower.

Still Can't Decide?

If you’re still trying to decide between term or whole life insurance, check out our best term life guide, which ranks our top company picks for term life insurance. The best option for you will depend on your needs and circumstances.

Although term life insurance is best in many cases, whole life insurance may be the best choice in some instances:

  • Business owners can use it to buy out the heirs of a deceased partner or for income replacement if a key employee or partner dies.
  • You can use whole life for estate planning to pay taxes or leave a legacy for your heirs.
  • The cash value of whole life insurance grows tax-free and can be borrowed against or withdrawn from tax-free.
  • Those supporting a lifetime dependent have permanent life needs, which whole life insurance can provide for.
  • Some whole life policies come with a long-term care rider, which you can use to pay for long-term care expenses while leaving your death benefit intact.

If your life circumstances make whole life the better choice, check out our whole life company recommendations.

Can You Switch Life Insurance Policies?

Life insurance needs can change over time, reflecting shifts in financial goals, family dynamics, or personal preferences. Understanding the options for switching between term and whole life insurance policies can help you with your changing needs.

From Term to Whole Life: Switching from term to whole life insurance is common and often done through a convertible term policy. This option allows you to convert your term coverage into a whole life policy without undergoing a new medical exam. The conversion can provide lifelong coverage, a cash value component and potentially locked-in premiums.

From Whole to Term Life: Transitioning from whole to term life insurance is less common. You might consider this switch to reduce premiums or if you need less lifelong coverage. However, this transition often means forfeiting the accumulated cash value in the whole life policy. You need to think carefully about your current needs, future goals and the financial impact of the change if you are considering doing this.

Alternatives to Term and Whole Life Insurance

Term and whole life insurance are not the only options available. There are alternative life insurance products that cater to different needs, preferences and financial situations.

  • Universal Life Insurance: Universal life offers flexible premiums and adjustable death benefits. The cash value can earn interest at a rate set by the insurer, providing potential growth. It's suitable for those seeking flexibility and a combination of insurance and investment.

  • Guaranteed Acceptance Life Insurance: This type of policy guarantees acceptance without a medical exam or health questions. This can be a good choice for individuals with health issues who may not qualify for other policies. Coverage amounts are typically lower, and premiums may be higher.

  • Indexed Universal Life Insurance: Indexed policies link the cash value component to a stock market index, offering potential for growth. It provides a balance between risk and reward, appealing to those comfortable with market-linked investments.

  • Variable Life Insurance: Similar to whole life, variable life offers a death benefit and cash value, but the cash value is invested in sub-accounts. It's for those seeking investment opportunities within their life insurance.

  • Final Expense Insurance: Final expense insurance is designed to cover funeral and burial costs. With lower coverage amounts and simplified underwriting, it's an accessible option for those seeking to ease the financial burden on loved ones after their passing.

Expert Insights on Term Life vs. Whole Life Insurance

  1. What are the main differences between term and whole life insurance?
  2. “Buy term and invest the difference” is a common phrase used to talk about why term insurance is a better strategy than permanent insurance. Is this good advice?
  3. What are appropriate situations where whole life or other permanent insurance is more appropriate than term?
  4. From a behavioral finance perspective is there a case to be made for buying whole life insurance instead of “buy term and invest the difference”?
  5. Is there value in having a mix of both whole and term insurance? Are there rules of thumb for figuring out how much for each?
Guy Baker, Ph.D.
Guy Baker, Ph.D.

Founder, Managing Director, MSM, CFP, CLU and ChFC at The Wealth Teams Alliance

John Lopez
John Lopez

Senior Professor of Practice at C.T. Bauer College of Business at the University of Houston

Tyler Flora
Tyler Flora

CEO & Mortgage Advisor

Jane Mepham, CFP®
Jane Mepham, CFP®

Founder & Principal Advisor at Elgon Financial Advisors

Ryan Klekar,  CFP®, CTFA
Ryan Klekar, CFP®, CTFA

Sr. Wealth Advisor & Shareholder at Truepoint Wealth Counsel

About Melissa Wylie

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Melissa Wylie is a Content and SEO Manager at MoneyGeek. Melissa has worked in the financial content space since 2018 and has spent much of that time focused on all things small business.

Prior to joining MoneyGeek, Melissa held SEO positions at Bankrate and LendingTree. Melissa’s work has also appeared on LendingTree-owned websites ValuePenguin and MagnifyMoney.

Melissa began her career at American City Business Journals in 2015 as a reporter for the company’s women-focused publication Bizwomen. Melissa has a Bachelor of Arts in Journalism from the University of North Texas. Melissa relies on her foundation in journalism to craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

Melissa's other work can be read on LendingTree and Bizwomen.