Term vs. whole life insurance: How to make the right choice

Most people can start shopping for life insurance by asking themselves one key question:

Do I need term life insurance or whole life insurance?

There are key differences between term and whole life insurance which impact what type of policy you need. Both term life and whole life have their benefits and drawbacks. Term life insurance is affordable and straightforward, while whole life doesn't expire, but is more expensive. Term life insurance is right for most people but that doesn't mean it's right for everyone, and some people may benefit from whole life insurance.

To decide between term life vs whole life insurance to protect your family, it’s important to know how they’re different and what makes each right or wrong for your financial scenario.

What is term life insurance?

Term life insurance is “pure” life insurance. The policyholder pays premiums regularly, for a set period of time, usually between 10-30 years. If they die while the policy is in effect, their beneficiary (or beneficiaries) receives a death benefit payout.

It’s straightforward and affordable, which is the selling point for people who want a simple life insurance option.

The key definition when it comes to term life is the term, or how long the policy is active. Term life policies expire after a set number of years, which is ideal for anyone who expects to build wealth over time or won’t need the financial safety net life insurance provides later in life.

After 20-30 years, many people have fewer financial obligations. Their mortgage is paid off, their kids don’t live at home anymore, and they can self-insure any remaining dependents with savings. They won’t keep paying for a policy they don’t need. But the term limit also limits coverage. If you still need that financial safety net when you’re in your 60s or 70s, you’ll need to shop for a new policy (which may be prohibitively expensive).

Term life insurance is also relatively inexpensive. Because there aren't any additional fees or maintenance, it’s much more affordable than whole life.

→ Learn more about term life insurance

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that stays in effect for your entire life. This means you never have to worry about uninsurability or losing your safety net as you get older. Whole life is more complicated than term because of its cash value, which is an investment-like product coupled with the insurance policy.

Each month, a certain portion of your premium goes into the cash value of the policy. (The exact amount that goes into savings is determined by your individual policy.) The policy's cash value grows over time. You can use the cash value to take out a loan, draw from it for retirement, or fund the policy premiums. Certain terms, conditions, and additional fees may apply when accessing the cash value.

Whole life insurance offers a guaranteed cash value, meaning it has a minimum growth rate and is a relatively safe investment compared to other types of permanent life insurance.

→ Learn more about the cash value of whole life insurance

Whole life insurance combines insurance and investing

Most people have separate insurance and investment products.

But if you have your insurance and investment bundled together, it works as a forced savings vehicle. Your whole life policy may also pay out dividends similar to a traditional investing vehicle.

The cash value also works well for people who have complicated financial situations. It’s often used to cover the estate tax, so your full inheritance goes to your beneficiaries.

But all of this comes at a price. According to Policygenius quotes as of January 2021 whole life insurance is much more expensive than term, sometimes as much as five to 15 times the cost. Many people don’t buy enough coverage or end up dropping the policy after a few years because they can’t afford it.

→ Learn more about whole life insurance

Term life vs. whole life: Coverage comparison

Methodology: Estimated term and whole life insurance costs based on policies offered by Policygenius in January 2021 from our 11 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica. Term life insurance rates are calculated based on a 20-year term life insurance policy for a non-smoker male in Preferred health rating.

Term life vs. whole life: Pros and cons

Term and whole life insurance policies both come with their own sets of positives and negatives. For most people, the negatives of whole life insurance outweigh the positives, making term life insurance the better option — but there are some circumstances where a whole life policy may be a better fit.

Term life insurance

Pros

• No hidden fees, exclusions, or risks

• Most affordable option

• Can cancel the policy before it expires without losing any value

Cons

• Coverage expires at the end of the term, so you’ll need to shop for a new policy or convert your policy if you still need insurance

Whole life insurance

Pros

• Doesn’t expire, so you can keep it for as long as necessary

• The cash value component is useful for estate planning

• Works as a forced savings vehicle

Cons

• Five to 15 times more expensive than term

• People often buy less coverage than needed or surrender policies early due to the high cost

• Other investments offer higher interest rates

• Surrender value of the policy changes with time

Term life vs. whole life: Cost comparison

As mentioned, whole life insurance is typically around five to 15 times more expensive than a comparable term life policy.

Term life insurance premiums stay at a guaranteed level for the policy duration, but some policy types can increase periodically. Term life insurance has two policy types that affect that cost — guaranteed level and annual renewable.

• Guaranteed level term life insurance keeps premiums the same for the entire policy term

• Renewable annual policies must be renewed periodically, with each renewal raising the premiums. This policy is best for short coverage periods because premiums typically start low compared to guaranteed level premiums, but get higher later on.

Whole life insurance premiums are level — they stay the same no matter how long you have the policy. The charts below compare the monthly cost of a 20-year term policy ($250,000 death benefit) and a whole life policy ($100,000 death benefit payable until age 65) for a non-smoker male living in Columbus, Ohio, with a Preferred rating at different ages.

Methodology: Quotes based on policies offered by Policygenius in January 2021 from our 11 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica.

Note that the term policy provides more than twice the coverage amount compared to the whole life policy, but is still significantly cheaper.

Not sure how much life insurance you need? Our handy calculator can help you figure it out in 10 minutes or less.

Term life vs. whole life: Make a choice

Whether you need term or whole life depends on your financial standing and why you’re purchasing life insurance in the first place. Most people need affordable and straightforward coverage for a set period of time — which is what term life offers. But there are some circumstances that whole life is better for, such as protecting an inheritance or a long-term need for coverage.

• Term life is right for you if: You’re on a budget, you expect to self-insure in the future, and you just want to leave behind a death benefit to cover expenses.

• Whole life is right for you if: Your estate will be subject to an estate tax, you want to build cash value, or you have long-term dependents. A licensed life insurance expert or financial planner can help you figure out which type of life insurance is best for you.

Term and whole life insurance each have their advantages and disadvantages, and the policy you choose will depend on your individual circumstances and budget. For the majority of people, term life insurance is the best-suited life insurance policy because it’s affordable and offers the same amount of death benefit as whole life insurance for a fraction of the price. At the end of the day, life insurance isn’t one size fits all.

By asking these questions, and knowing how term and whole life policies address each of them, you can make the right choice for yourself and your family.