Updated June 18, 2019

Term vs Whole Life Insurance

Read more about Life Insurance

Term insurance is affordable, but expires. Whole life insurance is costly, but lasts for life and has a cash value. Which is best for you? Learn the difference.

When shopping for life insurance, the first thing to decide is which type of insurance best fits your needs.

Term insurance is best if you only need coverage for a specific time. Whole life insurance is best if you need coverage until you die.

But what does this exactly mean?

Let's go over the differences and in what situations each makes more sense.

Term Insurance

Term insurance is simple and the less expensive option.

Term insurance lasts for a specified period of time (a term). If you die during the term, the death benefit is paid to your beneficiary. If you're still alive at the end of the term, the policy just ends with no payout.

It's a lot like car insurance. If you don't have an accident, you don't have a claim. When the policy ends, that's the end of it.

The downside is that it expires when it ends, and you're no longer covered. When that happens, you can choose to renew at a higher premium (as you're now older and closer to death), or convert to whole life insurance.

Term insurance doesn't have very many moving parts. The main things are:

  • The insured: person whose life is covered by the insurance
  • The beneficiary: person who will receive the payout
  • The premium: amount that is paid for the policy
  • The death benefit: amount the beneficiary will receive (coverage amount)

Pros of Term Life Insurance

  • Simple to Understand
    Term insurance is easy to understand. Just pick the coverage amount and the length of the term.

  • Level Premium
    During the entire term, the premium remains the same, even if you develop health issues.

  • Affordability
    This is the main benefit. It's not expensive, so families can afford to pay the premiums. It's an affordable way to ensure the hopes and dreams you have for your family can be achieved, even if you die prematurely.

    For example, a healthy 30-year-old man can buy a 30-year-term with $500,000 coverage for as low as $35/month. If he dies within the 30 years, his beneficiary will receive $500,000. For a woman, it could be even cheaper at $30/month.

    That's a lot of peace of mind for just a dollar a day.

Most life insurance needs are finite in nature; this is why term insurance is often the preferred option since you can select a term that corresponds to the length of time you need coverage. While the "use it or lose it" nature of term insurance can turn people away, a financial plan is usually better served by buying a less expensive term policy and investing the savings. The goal is not to be insurance rich, but rather to protect your family while putting yourself in the best financial position in the future.
Greg Klingler, director of wealth management for the Government Employees' Benefit Association

Whole Life Insurance

Whole life insurance lasts for your entire life. As long as you keep paying the premium, the insurance company will provide a payout upon your death.

Whole life policies also have a cash value component. This is similar to a savings account within the policy. The amount grows as premiums are paid. You can borrow from it if you need money (such as sending kids to college). And if you terminate the policy, you get the cash value amount.

In traditional whole life policies, you know upfront what the cash value will be every year. So it's like guaranteed savings. Newer styles of whole life policies have fewer guarantees. In whole life policies, the accumulation of cash value varies based on current interest rates or stock market returns.

However, whole life insurance is very costly. For the same death benefit ($500,000), the monthly premium for a healthy 30-year-old man could be $400/month. That's over 10x the cost of term insurance.

Pros of Whole Life Insurance

  • Cash Value
    The cash value is like a forced savings account. After the first few years of the policy, if you are short on cash, the policy can use the cash value to stay in force. You can also borrow from it. And you get your cash value if you surrender the policy, so you can recoup some costs.

  • Lasts Your Entire Life
    A whole life will be in force for the rest of your life as long as you keep paying the premium. This is good if you need the insurance payout no matter when you die.

  • Level Premium
    Most whole life policies have level premiums as well. This could be important to some people as you're more likely to have health issues in old age.

Which Is Best for You?

© CreditDonkey

The best policy for you is the one that provides the coverage you need at a rate you can afford.

When Term Life Insurance Makes Sense

Term insurance is enough for most people's needs. This is best if you only need coverage for a certain period of time.

Term insurance is ideal during the period when most families have the highest expenses and won't be able to cope with the loss of one income. Those times often include:

  • When your children are young.

  • If you don't have enough of a nest egg to provide financial stability if one parent dies prematurely.

  • Before your children complete college and become self-sufficient.

  • If you have a mortgage that consumes a large portion of the family income.

So for example, if your kids are toddlers, you can just get a 20-year term insurance policy. This will cover your family until they graduate college.

Term insurance is better for most people because it's affordable. Even if you have the money for whole life insurance, you can invest the difference in cost between term and whole life premiums. This will allow you to build a sizable investment portfolio on your own.

When Whole Life Insurance Makes Sense

Whole life insurance is great if you need the payout no matter when you die. This is mostly only for certain special circumstances, such as:

  • Pay Estate Taxes
    Whole life insurance will ensure that your heirs have the funds to pay hefty estate taxes after your death.

    Federal estate taxes don't come into play until your estate is over $10 million dollars. State estate taxes vary and can be due on much smaller estates.

  • Pay Funeral Expenses
    Older people without funeral savings could use permanent insurance to pay for final expenses. Younger people can use term insurance to cover funeral expenses.

  • Funding a Business Succession Plan
    If you are a member of a partnership, your spouse will be entitled to a significant percentage of the business when you die. Insurance provides the business with money it can use to buy the spouse's share of the business.

  • Care for a Special-Needs Child
    If you have a special-needs child who requires lifelong care, permanent insurance will ensure that he/she is covered no matter when you die.

  • Estate Equalization
    This is about being fair to your children. Insurance can help divide your assets equally amongst your children. For example, if you are leaving a business to one child, permanent life insurance can provide cash for your other children.


What are your priorities? Is it:

  • Death Benefit Guarantee
    If you absolutely need the death benefit payout no matter when you die, whole life insurance is the best option. But if you only need it up to a certain time, then term insurance works just fine.

  • Cost
    If your main concern is cost, buy term. You can always renew or convert it to whole life later. Just make sure the policy you buy is convertible.

  • Return on Investment
    If the main concern is not wasting money, do you really need life insurance? If you do, buy term and invest the rest.

Common Questions

Should you convert your term life to whole life?
If your health has changed or you've taken up a dangerous hobby (like motorcycle racing), and your term insurance is expiring, consider converting the insurance to whole.

Your premium on a converted policy may be lower for the same coverage because although the rate will be based on your current age, it is based on your health and hobbies when you bought the term insurance.

If you are not sure about your health, try to buy replacement coverage before your term insurance expires. If you don't qualify for good rates, then convert your term insurance to whole life.

Which type is best if you're in a high income tax bracket?
Some whole life plans provide options for both income and asset accumulation on a tax-deferred basis. These types of plans are complicated. Talk to someone with expertise in creating these arrangements.

Can a stay-at-home parent qualify for life insurance?
Yes. It's smart to take out life insurance on the stay-at-home parent. The cost of replacing the activities of a stay-at-home parent can be $100,000 a year. It'd be smart to take out a term insurance to cover the period until the children go to college (or no longer require at-home care).

This seems very complicated. Where can I get help?
Although you can buy life insurance online, if you're not sure of what you should buy, you should talk to a licensed professional agent. Working with a licensed agent can often get you a lower premium than you will get online because a good agent knows which company writes different types of policies the best. Look for an independent agent who can write insurance with more than one company.

Bottom Line

Term insurance is the best option for most families. It's affordable and will ensure your family is protected. It works just fine if you only need coverage for a certain period (such as until the kids graduate or until the mortgage is paid off).

Whole life insurance is a lot more expensive. In most cases, it's only for more special circumstances (such as if you have estate taxes, a business, or a special-needs child).

Think carefully about you and your family's needs. The most important thing is to get coverage that you can afford.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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