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    What’s the Difference Between Term and Whole Life Insurance?

    6 mins

    Nobody likes to dwell on how their loved ones will be taken care of when they die. But it’s something everyone has to consider at some point. When you explore your options, you’ll often come upon two different types of life insurance policies: term and whole life. What's the difference between term and whole life insurance? 

    Both types of insurance pay death benefits to your beneficiaries after you die. The biggest and most obvious difference between the two is the length of coverage: a term policy expires, while a whole life policy lasts a lifetime. 

    Term policies are cheaper and simpler. Whole life policies are more expensive but might end up being more valuable.

    Let’s go into more detail to cover the question, “What's the difference between whole life and term life insurance?”

    What Is Term Life Insurance?

    Term life insurance is very simple. It covers you for a set period of time, usually between 5 and 30 years. The insurance stays in effect during that time as long as you pay your monthly premiums.

    If you die during the covered period, your beneficiaries receive a “death benefit,” a cash payout to help them take care of their financial needs. 

    If you’re still alive when the term ends, the policy simply expires. Because term life insurance isn’t complicated, the premium is fairly inexpensive — an average of about $27 a month.

    The premium you pay hinges on a few factors, like age, physical health, and the amount of the death benefit you want. 

    For example, a 30-year-old Washington State man who doesn’t smoke might get a 20-year policy with a $500,000 death benefit for between $20 and $40 a month.

    That, in essence, is all there is to a term life policy — it’s “pure” insurance. If all you want is to make sure your beneficiaries get taken care of financially after you die, term life insurance may be all you need. 

    What Is Whole Life Insurance?

    Whole life insurance is more complicated and more expensive than term life. However, what it offers may make it more valuable to those who can afford the premium.

    A whole life insurance policy is permanent. It never expires if you keep up with monthly premium payments. The premium amount is also permanent — once the monthly rate is set, it’s set for life.

    But whole life insurance doesn’t just pay out a death benefit after you expire. It has some features you can take advantage of while you’re still living.

    Part of your monthly premium payment goes to the insurer. The other part is put in an investment savings account. As you continue paying monthly premiums, the savings account sum grows, just like a retirement plan or a mutual fund does.

    This means your whole life insurance policy has "cash value" that a term life plan doesn't. When a whole life investment account has built up enough value, you can draw money from it in the form of a loan or withdrawal.

    The investment component of a whole life plan can be very flexible. Some insurers may pay out additional dividends that you can reinvest. A policyholder may choose to pay more than their monthly premium, putting the difference into the savings account. All of this builds the policy’s cash value and earns interest.

    In the earliest stages of a whole life plan, you’ll find the monthly payments will be much higher than the insurance would cost on the open market. But that changes as you get older and build more equity in your account. 

    In the later stages of the policy, with all of the cash value you've built, the whole life premium can be less than what you’d pay for a new term policy.

    The complexity of a whole life policy has its drawbacks. While death benefits are guaranteed, they’re not 100% independent of the cash value component. If you take out a loan against the cash value and don’t repay it, your death benefit will decrease by the amount of the loan.

    Also, if you decide to stop paying for whole life insurance, you could be hit with a “surrender charge” — as much as 10% of the policy’s cash value. With term life, if you stop paying, the coverage just stops.

    Pros and Cons of Term Life Insurance

    Pros

    • Simple and uncomplicated

    • Guarantees a death benefit of a fixed amount

    • Lower premiums across the board

    • No substantial penalties for early termination

    Cons

    • Premiums can fluctuate

    • Usually need to get a medical exam

    • Health issues can make premiums more expensive

    • No opportunity to build wealth

    Pros and Cons of Whole Life Insurance

    Pros

    • Policy never expires

    • Premiums never change

    • Can help grow wealth through investment and interest

    • Gains on cash value are tax-free

    • Can eventually draw on cash value for loans or withdrawal

    • A medical examination is not always required

    Cons

    • Premiums are between 5 and 15 times more than term life

    • Terms can be overly complex

    • Death benefits decrease if policyholder withdraws cash or doesn’t repay loans

    • Early policy termination may have penalties 

    Which Is Better: Term or Whole Life Insurance?

    The decision to get term or whole life insurance depends on your situation, needs, and premium payment ability.

    If all you want is to make sure your children are covered in case of your untimely death, term life might be all you need. You can get a 20-year term life policy after your baby is born that will ensure financial stability until they become independent adults.

    Whole life insurance may be a possibility if you’re looking to build personal wealth and don’t mind the blend of insurance and investing. It’s a solid choice for those who want to leave money for heirs or have permanent dependents like disabled children that need added care after they die. 

    The Bottom Line

    What’s the difference between term and whole life insurance? One covers a short-term need; the other is a lifelong financial strategy. Both are valid options, so consider your current situation and future goals as you decide.

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    Kristina Dinabourgski
    Has a passion for demystifying benefits 🎉
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