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What’s the difference between term and whole life insurance?

Fact-checked with HomeInsurance.com

New to understanding life insurance and which type you need? Term and whole are the two primary types of life insurance with major distinctions that should make it a little easier for you to understand which would be a better fit for you.

In this article, we’ll explore what you need to know about both. 

What is term life insurance?

Term life insurance purchased for a period of years (10, 20 or 30 years in most cases). Should you pass away during this time period, your selected beneficiary will receive your death benefit. Most term life insurance packages come with the option to transition to whole life insurance if you want to do so at some point during the term. 

A sample quote indicates that a healthy 30 year old can expect to pay between $20-$30 a month for a twenty year policy with a $500,000 payout. If there are known health conditions, the monthly premium would likely increase depending on the condition and severity. 

Term life insurance

ProsCons
Cheaper than whole lifeIs only temporary
Most can be converted to whole lifeMay have to requalify at the end of the term
Death benefits are received by beneficiaries tax freeMonthly premiums increase with renewals
Great for parents of young childrenNo cash value is accumulated
Death payouts are larger than whole life insuranceCan be difficult to get if you have known health issues

What is whole life insurance?

Whole life insurance can be thought of as a type of permanent life insurance. As long as you make your monthly payments, your beneficiaries will receive a death payout no matter when you die. Furthermore, your monthly payments are fixed for the duration of the policy.

Another major difference between term and whole life insurance is that with the latter, your account accumulates cash value with each payment. You can withdraw the amount in the form of a loan, or you can apply it to any monthly premiums. Should you not repay any loans, the death benefit your beneficiaries receive will be smaller.

As with term life insurance, whole life insurance comes with its own list of pros and cons.

Whole life insurance

ProsCons
Premiums are fixed throughout the account holder’s lifePremiums are more expensive than term life insurance 
Accounts build cash value over timeInterest on any money withdrawn
Can be used as an investment platformCash value accounts are not give to beneficiaries when you die, but instead are kept by insurance companies
No need to requalifyIf you cancel your policy, any cash value accumulated is subject to fees
Payout guaranteedDeath benefits are typically smaller than term life insurance policies

Term versus whole life insurance 

Let’s compare the differences between term and whole life insurance.

Cost is the first major difference between the two. Term life insurance premiums are generally cheaper than whole life insurance policy premiums — assuming you are in good health. Should you pass away during your chosen term, the death benefit your beneficiaries receive is larger compared to a whole life insurance plan as well. Should you expect to live well past your term, most policies can be converted to a whole life policy if you sign up before the deadline.

Whole life insurance has set premiums for your entire life, but the monthly payment amount is typically higher than term life insurance premiums.  Though there are numerous drawbacks, whole life insurance is a good option for many people— particularly those who have life-long dependents with special needs.

Another key difference between whole life insurance and term life insurance is that a whole life account accumulates cash value with each payment, but there are generally better ways to invest your money. 

FeatureTermWhole
Accumulates cash value
Custom policy length
Guaranteed payout 
Lifelong coverage
Low premium
Potential annual dividend eligibility
Set premium

Term versus whole life insurance: cost difference

Term life is generally less expensive because the policy lasts a set period. Assuming you’re healthy and in your early 30s, your monthly premium should be around less than $50, based on our sample quote. 

Whole is more expensive because it’s a guaranteed payout, which means the insurance company knows that at some point it is going to write a check to your beneficiaries. A healthy 30 year old can expect to pay around $2,000 a year, which is significantly more expensive than a term life policy. 

Which one’s best for me?

Depending on your situation and goals, you may be better served by either term or whole life insurance. Here’s how to decide.

Why choose term life insurance?

  • More affordable premiums. 
  • You want a larger death payout should you die unexpectedly. 
  • You only want coverage for a set period of time when the need for financial coverage for your dependents is highest

Why choose whole life insurance?

  • You want a policy for your whole life with fixed premiums.
  • You like the possibility of annual dividends.
  • You want a policy that accumulates cash value.
  • Your life insurance will be a financial legacy.

Can you have both term and whole life insurance?

There isn’t a limit to the amount of life insurance policies you can have. You can purchase term life and whole life. Although it would be simplest to obtain policies from different providers, as long as you have the money, you can purchase as many of each as you want. However, there are more effective ways to invest your money and see higher returns, so purchasing both term and whole life insurance would be a fairly unproductive decision.

Alternatives to life insurance

While whole life insurance may serve as an investment vehicle of sorts, and term life insurance can be a great security measure for short-term protection, let’s look at a few alternative ways to invest or protect your money where you might see higher returns.

Predictable, secure alternatives to grow money include:

  • Mutual funds
  • Roth 401(k)
  • Roth IRA
  • Traditional IRA
  • 403(b)

The key to remember is that as long as you are setting aside money each month (say 10-15% or more), you’re going to be able to leave something behind for your spouse and beneficiaries— especially if you pay off your house as well as your debt.

The takeaway

  • Term life insurance only lasts for a set period of time and are cheaper and easier to obtain
  • Term life insurance is best for the period of life when the need for financial provision is greatest
  • Whole life insurance guarantees a death benefit payout and provides potential for investment, but premiums are more expensive.
  • Term life insurance is typically a better fit for most individuals, as there are more lucrative alternatives for investment beyond life insurance.

Life insurance is designed to leave money behind for your family or other beneficiary when you pass away. When deciding between term and whole life insurance, the key is to evaluate your outstanding debt and decide what kind of premium fits into your immediate budget. For long-term goals, it may not be the best use of your money to choose a whole life insurance policy as an investment vehicle.

Lauren Ward

Lauren Ward is a writer for Coverage.com. She specializes in all things personal finance, including insurance, loans, and real estate.

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