Term vs. Whole Life Insurance: Everything You Need To Know

What Is Term Life Insurance?

Term life insurance pays out a death benefit if the insured person dies within the period set by the policy (usually 10, 20 or 30 years). This type of life insurance is less expensive, and the premiums you pay are locked in for the policy’s term, as is the value of the death benefit.

If the policyowner lives past the years covered by the term life policy, the coverage expires, and the policyowner won’t receive a payout or refund of their premiums.

Many people use term life insurance to ensure their beneficiaries receive enough money after their death to replace lost earnings, pay off a mortgage or fund a child’s college education.

The “term vs. whole” discussion is a hot topic in the financial world. In my professional opinion, most people need term life insurance, while whole life is a luxury. I see whole life normally utilized when there are specific goals like forced savings, final expenses, a lot of extra income or if you’ve maxed out all retirement contribution accounts and still have extra money you’d like to park in a safe spot. While I don’t think it’s for everyone, it will work for someone.

Eric EstevezLicensed Independent Insurance Broker and Owner of HLC Insurance Broker, LLC

Eric Estevez is an independently licensed life insurance agent who serves as a financial professional for a multinational corporation. Upon graduating from William Paterson University with a bachelor’s degree in accounting, Eric kickstarted his career as a financial institution auditor. His first day on the job was Sept. 15, 2008…

What Is Whole Life Insurance?

Whole life insurance pays out a death benefit when the policyholder dies as long as they have continued paying their premiums. Whole life coverage doesn’t have an expiration date like term life, so whole life premiums tend to cost more.

The other main feature of a whole life policy is that it has a cash value that accumulates over time as the policyowner pays their premiums.

Whole life policyowners can access the cash value of their policies, borrowing against it or taking partial withdrawals of the value. However, these withdrawals reduce the value of the policy’s death benefit.

Term vs. Whole Life

Term and whole life insurance have a few major differences. Term life coverage expires after a set number of years, but premiums cost less. You’ll pay more for whole life insurance coverage, but your coverage won’t expire as long as you pay premiums, and you’ll have the option to withdraw from or borrow against the cash value of your policy. 

Term vs. Whole Life Insurance Features

Feature	Term Life	Whole Life
Guaranteed death benefit
Fixed premiums
Cash value
Coverage doesn’t expire
Surrender value

The cost difference between term life insurance and whole life insurance premiums can be significant. For example, a 40-year-old woman in good health who wants to purchase $500,000 in life insurance coverage could pay as little as $35 a month for a 30-year term life policy. That same amount of coverage in a whole life policy would cost as much as $525 a month.

Keep in mind that the older the policyholder is, the higher rates are. Getting life insurance coverage when you are younger and healthier will keep your premiums lower, especially if you choose a policy that locks in premium costs.

Should I Get Whole or Term Life Insurance?

There are several situations where buying one kind of life insurance is a better option. Here are a few of the most common scenarios for each type, but your needs may differ. Check with your financial advisor if you aren’t sure which insurance is right for you.

Choosing Term Life Insurance

• You only need coverage for a certain length of time. Term policies are a way to replace your income in the event that you die before you’ve paid off a mortgage or put your children through college. Many people opt for a policy that covers the working years they have left before retirement.
• You need affordable coverage. Because term policies expire (and there is no cash value component), they are more affordable than whole life policies.
• You are considering getting whole life coverage in the future. Some companies will let you convert a term policy into a whole life policy. While the rates after converting to a whole life policy will be higher than the term rates, they might be less expensive than buying a new policy.

Choosing Whole Life Insurance

• You won’t have trouble paying the premiums, even after retirement. Committing to a whole life policy means you need to continue paying premiums past your earning years. This could be the right thing to do if you can afford it.
• You want to have cash value guaranteed by the insurance company. With a guaranteed cash growth rate, you can see a higher death benefit than with a term policy.
• You have financial commitments for lifelong dependents. If you have dependents who will require long-term financial help after you’re gone, whole life insurance can help you fund a trust.

There might even be cases where having both a term and a whole life policy could be beneficial. Each type of policy can serve a different role in your financial plan.

For example, imagine you have 20 years left to pay off your mortgage. You don’t want to worry about your spouse being able to pay the mortgage if you pass away, so you might purchase a 20-year term life policy with a death benefit sufficient to pay off the remaining mortgage balance.

Maybe you also have children and want to leave an inheritance for them and make sure they have money for final expenses. In that case, you might also buy a whole life policy with coverage that won’t expire to cover both your temporary financial obligations and your permanent estate planning needs.

Term Life vs. Whole Life Insurance FAQs