Term vs. Whole Life Insurance: Life insurance benefits your loved ones when the inevitable happens. While it can be tough to think about your own death, choosing the right term or whole life insurance policy can protect your household and allow you to leave a legacy to those you care about the most.
To learn more, visit our guide to the Best Life Insurance Companies of 2023.
Term life insurance provides a guaranteed death benefit only if the insured person dies during the term, or the period of time the policy is in effect. Typically, that’s anywhere from one to 30 years or until a specific age. Term life insurance tends to be much cheaper than whole life coverage because term policies do not have a cash value component and may expire without paying any benefits.
Whole life insurance is a form of permanent life insurance that covers the person for their entire life rather than a fixed period of time. Whole life pays a guaranteed death benefit and has a cash value component that the policyholder can borrow against or withdraw under certain conditions.
As the name implies, whole life insurance lasts your whole life. As long as you keep making premium payments, this type of lifelong coverage will pay a guaranteed death benefit when you die. Some key features of whole life insurance are:
- Premiums are guaranteed. When you buy this kind of life insurance, the premium is locked in. It will not increase during the life of the policyholder. In general, the higher the death benefit, the greater your premium will be.
- Cash savings grow over time. You may be able to borrow against the equity or withdraw some of the money. However, if you die before the loan is repaid in full, the death benefit will be reduced by the amount still owed. You may also be able to surrender the policy and receive the cash value.
- A medical exam is often mandatory. Depending on the policy type, you may be required to submit to a physical examination before your application is approved in order to determine your premiums and insurance risk. Some companies do offer no-exam whole life insurance policies that have a guaranteed payout and may accumulate cash value, but these policies tend to have coverage levels that are much lower, usually $25,000 or less.
To learn more, visit our guide to the Best Whole Life Insurance Companies of 2023.
Term life insurance lasts for a specific term, or period of time, and pays the beneficiary a guaranteed death benefit only if the policyholder dies during the term. However, some term life policies offer a return of premium feature, which gives back some or all of the premiums if the policyholder does not die before the term expires. Return of premium term life policies are generally more expensive.
- Premiums may change. The most common type of policy, known as level term, has fixed premium rates, but there are other policy types where premiums increase or decrease over time with corresponding changes to the death benefit amount.
- Some policies can be converted to whole life. Some insurers allow conversion at any time during the policy term while others impose time or age limits. You may also be able to convert the policy at the end of the term. If you want the option to convert your coverage, look for a policy that contains a provision for conversion or offers the option of adding a term conversion rider.
- Terms are flexible. Most insurers offer policy terms ranging from one year to 30 years or longer, although some companies also offer terms that last until a certain age, such as 65. In general, the shorter the term and the younger you are, the lower your premium will be.
- A medical exam may not be required. While many insurers still require an exam for a basic term life insurance policy, several insurers now offer no-exam term life insurance.
To learn more, visit our guide to the Best Term Life Insurance Companies of 2023.
In general, a term life policy is much cheaper than a whole life policy. For example, a hypothetical 40-year-old woman who is a nonsmoker could pay as little as $52 a month for a 20-year, $1 million term life insurance policy. If that same woman wanted a whole life insurance policy, she’d pay $1,000 or more per month, according to our data.
Term coverage is cheaper because it pays out only if the insured person dies during the term of the policy. Whole life insurance costs more because it pays a survivor benefit regardless of when the individual passes and also accrues cash value over time.
To learn more, visit our guide on How To Buy Life Insurance.
Whether term life insurance or whole life insurance is the best fit for you will come down to your family situation, budget, long-term goals, and other factors. Here are some considerations to help you make the right decision.
Term life insurance will benefit you if:
- You don’t want to tie up your cash flow. Term life is generally much less expensive than whole life, and it may be the better option if you want a lower premium payment.
- You want to protect family members financially. Term life is a good choice if you want to ensure your spouse or dependents are protected against large debts or expenses, such as a mortgage or child care, by a guaranteed death benefit for a set period of time. An example of a time period would be your income-earning years. To learn more about financially protecting your loved ones, see our guide, How Will Life Insurance Pay My Beneficiaries?
- You want the flexibility of waiting to purchase whole life insurance. Some term policies can be converted to whole life insurance at a later time, but check the term policy to make sure it offers that option and note any conversion timeframe it may require. Keep in mind that after the policy’s term expires, you will not be able to convert it to a whole policy.
Whole life insurance will benefit you if:
- You want a policy with accruing cash value. Unlike term life insurance, whole life has a cash value that builds over time on a tax-deferred basis. The cash value can be used as a savings vehicle for retirement, or the policy can be closed out if you’re in financial need, although you’ll need to pay a surrender charge if canceling the policy early. You can also withdraw some of the cash value from the policy or take out a loan against its equity, but remember that any cash value taken out will need to be paid back for your beneficiaries to receive the policy’s full benefit.
- You want a policy to last your entire life. Whole life insurance policies will remain in effect for the duration of the insured person’s lifespan, as long as the premiums are paid. This is in contrast to term life policies that end after a specified period of time.
Life insurance takes multiple forms. Depending on your needs and financial goals, one of these types of permanent life insurance may be worth considering:
- Universal. A universal life insurance policy has a bit more flexibility than whole life. For example, you may be able to increase the death benefit or change your premium payments. Typically, the policy earns money based on either the market index or the insurer’s investment portfolio. However, the value could potentially go down should the rate decrease.
- Indexed. This insurance coverage has a cash value as well as a death benefit. The cash value account earns interest based on a stock market index your insurer chooses. There’s no fixed rate, but insurers typically pay out a minimum rate. You can generally borrow or withdraw from this policy and adjust the premium payment and payout.
- Variable. In addition to a death benefit, variable life insurance has a savings account that can be invested in stocks, bonds, or money market mutual funds. This of course carries risk: If your investments don’t do well, both your cash value and death benefit could fall. Some policies guarantee that your payout won’t drop beyond a stated minimum.
- Final expense. Also known as burial insurance, this is a type of whole life policy with a fairly low payout – typically $5,000 to $25,000 – that is purchased specifically to pay for end-of-life expenses such as a funeral and burial or cremation. The payout is small, but so are the premiums: They can be as little as a few dollars per week.
As you shop for insurance, you’ll likely see various types of policies, including variations of those listed above, such as variable universal life and indexed whole life. For more information, visit our guide to Life Insurance Quotes.
Do I need both term life and whole life policies?
This depends on what you need from your life insurance policy and what your budget is. If you are in your early 20s, it might be better to get a term life policy. Since many people at this age are renting instead of having a mortgage and might not have much in a savings account, replacing your income will be the priority. A term life policy can do this without a hefty monthly cost.
As you get older and have more assets, you can add a whole life policy to supplement the term life policy or replace it. This policy can be an added level of support when it comes to your finances. If you need emergency funds while you’re living, this policy can help. It will also help your beneficiaries once you have died.
To find out what policies you need, speak with your agent or a financial planner, and check out our guide, What Type of Life Insurance Is Right for Me?
Can you convert term insurance to whole life?
If you hold what’s known as a convertible term life insurance policy, you should be able to convert it into a whole life policy. Some companies impose a deadline or age limit for doing so, while others will let you convert your policy at any time during the term. Depending on the insurer, a medical exam may not be required. But bear in mind that your new premium likely will be much higher, as whole life insurance is more expensive than term coverage.
Not every insurer offers convertible term life insurance. Check your policy or contact your agent for details.
Can you convert whole life insurance to term life?
A provision called an extended term insurance option lets you surrender your policy and use the available cash value to buy an equal amount of term life insurance. This option may be worth considering if you can no longer afford your whole life premiums. It’s important to remember that the new term life policy might not last the rest of your life.
Can I withdraw cash from a term or whole life policy?
One of the reasons term life policies are typically less expensive than whole life policies is that term life policies do not come with the cash value component that is a common feature of whole life. A term life policy provides a guaranteed death benefit if the insured dies during the coverage period, but it does not offer a tax-free savings component that can be withdrawn or borrowed against the way a whole life policy does.
Under certain conditions, whole life insurance policies do allow policyholders to borrow against the policy’s equity or withdraw some of the money. It might also be possible to surrender the policy for cash value. Those considering these options should keep a few things in mind.
If a loan is taken out against the policy, the amount must be repaid for the beneficiaries to receive the policy’s full benefit. Meanwhile, a withdrawal, which is different from a loan, can reduce the policy’s death benefit. And if the policy is closed out early, payment of a surrender charge may be required.
Does whole life insurance cover long-term care?
Depending on the company, it may be possible to buy a whole life insurance policy with an optional add-on called a long-term care rider. This additional coverage can be used for expenses that aren’t covered by health insurance – namely, assistance with daily tasks such as bathing, eating, or dressing – while in the care of a nursing home, long-term care facility, or a home health aide.