Term vs. Whole Life Insurance: What’s the difference?
Quick Facts
Term life insurance is only good for a specific time length
Whole life locks in rates for life if you make payments
Term is the cheapest form of life insurance, and whole life is significantly more expensive
There are many options regarding life insurance. Your lifestyle, financial concerns, and income determine what kind of life insurance to buy and how much you need.
Term and whole life are the two most common life insurance types. Term insurance is typically cheaper because it’s only valid for a specific timeframe, usually 30 years or less.
On the other hand, whole life insurance lasts your lifetime if you make payments. It’s much more expensive though, since it lasts the longest.
Life insurance offers peace of mind that your family will be financially secure after your death, so consider their financial needs when buying a policy.
Keep reading to learn the difference between term and whole life insurance and which suits you.
What is term life insurance vs. whole life insurance?
Term and whole life insurance offer you peace of mind and financial assistance for your family if the worst should happen. However, they are quite different.
Term life only applies for a specific period, whereas whole life is good for your lifetime if you make payments.
In addition, costs and benefits are significantly different between the two. For example, term life is cheaper, but whole life includes a cash value you can withdraw money from.
There are also several types of term life insurance, and whole life is just one type of permanent life insurance.
This guide will discuss the basics of term and whole life insurance to help determine which is right for you. Scroll down to learn more about term and whole life insurance.
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What is term life insurance?
Term life insurance lasts a specific amount of time and only pays if death occurs during that time frame. After your term is up, your policy ends. At that point, you can renew it, but rates will be significantly higher.
However, term life is a popular option since initial rates are very low and locked in for the policy’s length. In addition, the death benefit is locked in for the term. It’s also a more budget-friendly option since whole life insurance can cost up to 15 times more.
How much term life insurance do you need? Your lifestyle and financial obligations determine how much term life insurance you need. For example, if you have a home or young children, you’ll want enough insurance to pay off your mortgage or college for your kids.
Term life is only insurance — it doesn’t offer cash value or allow you to borrow against it. Additionally, it doesn’t build wealth or leave a large inheritance. Instead, it’s simply a way to meet particular financial obligations if the need arises.
How long are term life policies?
The length of term life insurance policies varies but typically ranges in five-year increments from 10 to 30 years. However, some insurers offer policies up to 40 years.
Remember that once your term ends, your rates increase. So, if you think you’ll need coverage for a longer period, choose the longest term offered to keep rates as low as possible for as long as possible.
Some insurers let you convert a term policy to a whole life policy, so do some research before buying term life insurance. Choosing a company that allows you to change your policy offers flexibility if your needs change.
What are the pros and cons of term life insurance?
Like any insurance product, term life has benefits and drawbacks. Carefully consider the pros and cons before choosing a life insurance product.
Pros of term life insurance include:
Significantly cheaper rates than other insurance types
Locked-in rates for a certain period
Straightforward policies
Term life insurance is an inexpensive way to secure your family’s financial needs after your death. If you choose a policy with a long term, it may cover your financial concerns until your children are adults or your mortgage gets paid off.
Cons of term life insurance include:
Policies only last for a certain amount of time
Rates increase significantly once the original term ends
No cash value accumulating wealth
Since your policy expires, you may not receive any benefit for the money you’ve paid. In addition, rates increase with a longer term, higher payout, or certain medical conditions.
What is whole life insurance?
Whole life insurance offers coverage for life if you make your payments. Rates are locked in, so there’s no increase or need to find new coverage.
However, rates are significantly higher than term life insurance. While rates may be up to 15 times higher than a term policy, they won’t increase in the future.
Whole life also has a cash value. As you make payments, part of the money contributes to your policy’s cash value. The longer you have your policy, the higher the cash value. After a certain point, you can borrow or withdraw against your policy’s cash value.
You can then use the money however you want, such as paying off your mortgage or college for your children. The amount you withdraw isn’t taxed, but you’ll have to pay taxes on any gains.
While you can choose whether to pay back the amount you borrow, it affects the death benefit. For example, if you borrowed $100,000 and didn’t pay it back before death, the death benefit would decrease by that amount
Keep in mind that you can choose to stop making payments if your financial situation changes. However, many insurers charge a surrender fee of up to 10% of the policy’s cash value. In addition, rates will be higher if you buy more life insurance.
What are the pros and cons of whole life insurance?
Now, let’s break down the benefits and drawbacks of whole life insurance.
Pros of whole life insurance include:
Locked-in rates for life
Accrued cash value you can withdraw from
Tax-free death benefits
Whole life insurance is an excellent option for people wanting to build wealth and use their life insurance to access money later in life. Additionally, rates don’t increase with age or changing medical concerns.
Cons of whole life insurance include:
Significantly more expensive rates
Reduced death benefits when you borrow from the cash value
You may have to pay a surrender fee if you stop making payments
In addition, whole life insurance policies offer many options, such as accidental death and dismemberment, which can confuse the process. Since rates are so expensive, knowing what you need to avoid paying for unnecessary coverage is essential.
What should you consider when deciding between term vs. whole life insurance?
When comparing whole life insurance vs. term, your financial situation and needs determine the necessary life insurance type.
If you can’t afford costly rates for whole life, consider a considerably less expensive term life policy. Although you can’t access a cash value, term life insurance can still meet your financial needs.
However, you must consider your financial goals if you can afford whole life insurance. For example, do you want to use your whole life policy for retirement, leave your children an inheritance, or pay off debt, such as tuition, later in life?
Also, consider other financial needs, such as children or other family members who may need continuing medical care. Since a whole life policy accrues a cash value, you can use it to provide necessary care to those who need it.
As with any life insurance, rates vary greatly by the person for whole and term life insurance. For example, your medical history and condition play a huge part in determining rates. As you age or have increased medical concerns, rates increase.
The younger and healthier you are when you buy either term or whole life insurance, the lower your rates. If you choose term life insurance, pick the most extended term available to keep your rates low for as long as possible.
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Term Life vs. Whole Life: Which one is better?
When choosing whole life vs. term life, there is no right or wrong answer. The best type of life insurance is the one that fits your specific needs.
If you need peace of mind that your mortgage gets paid off or your kids’ college gets paid, term life may be right for you. It’s also a great option for people who need coverage with low rates.
However, if you’re looking for life insurance that’s also an investment, consider whole life. Whole life is also a good option for people with special-needs children that need continuing care.
Do agents get life insurance commissions?
Yes, agents get commissions up to 100% the first year they sell a life insurance policy. After that, residual commissions drop to under 10% in the following years.
Term vs. Whole Life Insurance: The Bottom Line
Both term and whole life insurance offer guaranteed death benefits and locked-in rates. However, each type of policy offers different benefits and drawbacks.
Term life insurance is the cheapest option, but it’s only good for a specific period. After your policy ends, you’ll have to find new coverage with increased rates.
Term life is a good option for people with mortgages, children, or other financial obligations who want to ensure those needs get met.
On the other hand, whole life insurance provides coverage for your entire life if you make payments. Unfortunately, while whole life also has a cash value that you can borrow, it’s up to 15 times more expensive than term life.
Now that you know the difference between whole life insurance and term, you can decide which is right for you. Compare multiple companies to find one with the coverage you need and the lowest rates.
Frequently Asked Questions
What happens when a term life insurance policy ends?
Once your term life insurance policy ends, you must start a new policy if you want to keep term insurance. However, your rates may be significantly different than your previous policy.
Remember that some insurers allow you to convert your term insurance policy to a whole life policy, but not all insurance companies allow this.
Does a term life insurance policy have a cash value?
No, term life doesn’t have cash value. Instead, consider a whole life insurance policy if you want cash value insurance.
What are the cons of a whole life insurance policy?
Although a whole life policy accrues cash value, that money goes back to the insurer if not used before death. In addition, whole life is more expensive than term life.
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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
