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. In this article, we will compare whole life insurance and term life insurance, highlighting the key differences between the two and helping 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 typically favored by those who need coverage for a specific period of time, such as when they have dependents who rely on their income. On the other hand, whole life insurance may be preferred by those who want lifetime coverage and are willing to pay a higher premium for it. Additionally, 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.
Cost of Term Life Insurance vs. Whole Life Insurance
The cost difference between term and whole life insurance can be substantial. Whole life can cost up to 20 times more than term life insurance. To get an idea of the cost differences between whole and term life insurance, look at the pricing comparison below.
Comparing Costs: Term Life vs. Whole Life
Annual Cost
$317
Annual Cost
$6,127This is 1833% more expensive.
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Benefits of Term Life Insurance vs. Whole Life Insurance
When comparing term life insurance versus whole life insurance benefits, term policies offer cheap coverage and a death benefit. Whole life policies provide a death benefit, cash value and dividend potential and can be used for estate planning. Both are eligible for riders, which vary by company.
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. Consider why term life insurance is better than whole life for many buyers.
Why Term Life Insurance Is Better in Most Cases
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, eventually, your children will grow up and be independent, possibly eliminating the need for the death benefit.
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 control your money and potentially reap higher returns than the modest interest rate in a whole life policy.
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.
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 if you should die before you’ve fully paid them. Once you’ve paid them off, there’s no longer a life insurance need to cover them.
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.
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 and then convert what you need to permanent life insurance when your temporary 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 solve.
- 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.
Expert Insights on Term Life vs. Whole Life Insurance
- What are the main differences between term and whole life insurance?
- “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?
- What are appropriate situations where whole life or other permanent insurance is more appropriate than term?
- 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”?
- 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?
Sr. Wealth Advisor & Shareholder at Truepoint Wealth Counsel
Senior Professor of Practice at C.T. Bauer College of Business at the University of Houston
Founder, Managing Director, MSM, CFP, CLU and ChFC at The Wealth Teams Alliance
CEO & Mortgage Advisor
About Mark Fitzpatrick
