More on Life Insurance
Term vs. whole life insurance
Term life insurance covers you for a specified time period (typically 10-30 years), while whole life insurance covers you for life. Learn the pros and cons, cost differences, and common features of each.
KEY TAKEAWAYS
Term life insurance is the right choice for most shoppers
Whole life insurance is five to 15 times more expensive than term life
Whole life has a cash value component that acts similarly to a low-interest investment
Buying life insurance can seem daunting. But most people can start shopping by asking themselves one key question:
Do I need term life insurance or whole life insurance?
First, there are differences between term and whole life insurance, but some concepts are the same across all types of life insurance. Each of the common life insurance definitions can be found on our glossary of life insurance terminology. Both 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 or 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 else do you need to know? Let's dive in!
TABLE OF CONTENTS
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 in increments of 5 years. If they die while the policy is in effect, their beneficiary (or beneficiaries) receives a death benefit payout.
It’s very straightforward, 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 - how long the policy is active. Term life policies expire after a set number of years, making them good policies for anyone who expects to build wealth over time or won’t need the financial safety net life insurance provides later in life.
This is ideal for most people: After 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 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.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance, which 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 overall, but a key thing to understand is the cash value, which is an investment-like product coupled with the insurance policy.
Each month, a certain portion of your premium will go into a tax-deferred savings account, or 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 do many things with the cash value, including taking out a loan, drawing from it for retirement, or funding the policy.
Whole life insurance has a cash value, and it’s relatively safe compared to other types of permanent life insurance. Whole life insurance offers a guaranteed cash value, meaning it has a minimum growth rate. → 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 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 a few years in because they can’t afford it.
→ Learn more about whole life insurance
Term life insurance vs whole life insurance: Quick comparison guide
| FEATURES | TERM LIFE INSURANCE | WHOLE LIFE INSURANCE |
|---|---|---|
| Duration | 10 - 30 years | Life |
| Cost | $25-35/month | 5-15x more than term |
| Guaranteed Death Benefit? | Yes | Yes |
| Guaranteed Cash Value? | No | Yes |
| How Cash Value Grows | N/A | Earns interest at a predetermined fixed rate |
| Premiums | Can increase periodically or stay level for the policy duration | Level |
| Notes | No risk of losing coverage, but no cash value when term ends | No risk compared to other permanent types, but you may find better investment options elsewhere |
Associated costs for term and whole life insurance policies are based on quotes from policies offered by Policygenius as of November 2020. Life insurance companies quoted include: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica.
Term life vs. whole life insurance 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 and term life insurance is the better option — but there are some circumstances where a whole life policy may be a better fit.
Term life insurance pros and cons
| Pros | Cons |
|---|---|
| No hidden fees, exclusions, or risks | 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 |
| Most affordable option | |
| Can cancel the policy before it expires without losing any value |
Whole life insurance pros and cons
| Pros | Cons |
|---|---|
| Doesn’t expire, so you can keep it for as long as necessary | Five to 15 times more expensive than term |
| The cash value component is useful for estate planning | People often buy less coverage than needed or surrender policies early due to the high cost |
| Works as a forced savings vehicle | Other investments offer higher interest rates |
| Surrender value of the policy changes with time |
Term and whole life insurance 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 can increase periodically or stay at a guaranteed level for the policy duration. Term life insurance can come in two forms that affect cost — guaranteed level and annual renewable.
- Guaranteed level term life insurance keeps premiums the same for the entire policy term, but renewable annual term life insurance must be renewed periodically, each time raising the premiums.
- Renewable annual policies are 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) for a male with a Preferred rating at different ages.
| Age | Term ($250,000) | Whole ($100,000) |
|---|---|---|
| 20 | $17.02 | $66.00 |
| 30 | $16.94 | $89.00 |
| 40 | $22.96 | $136.00 |
| 50 | $50.64 | $217.00 |
Methodology: Quotes based on policies offered by Policygenius in November 2020 from our eleven 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.
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Final questions to ask when deciding between term & whole life insurance
A licensed life insurance expert or financial planner can help you figure out which type of life insurance is best for you, but you can also ask yourself a few quick questions:
- How much can I afford to pay each month for life insurance? If budget is a concern, definitely go with term life insurance, as it’s much cheaper.
- What are my assets, debts and estate value? If your estate will be subject to the estate tax, a whole life policy can help cover that.
- Do I expect to self-insure in the future? If you go with term life, you need to be OK with your coverage running out and you’ll need to self-insure.
- What are my goals for my life insurance? If you just want to cover expenses for your family, go with term life insurance. If you want to build cash value, choose whole life insurance.
- What do I want to leave behind for my loved ones? The death benefit of a term life policy can go directly to your family, while a whole life policy is usually used to pay for the estate tax.
By asking these questions, and knowing how term and whole life insurance address each of them, you can make the right choice for yourself and your family.
The bottom line
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.
Most people shouldn’t get a whole life insurance policy because of its permanence and high premiums, but if you have a high-net-worth or a lifelong dependent, then the higher cost might be worth the security you can find in a permanent policy that accrues a cash value.
At the end of the day, life insurance isn’t one size fits all. Determining whether you want to just cover your family’s expenses and invest your money elsewhere or build cash value will help you determine if a term or whole life policy makes the most sense for you. Our insurance experts are here to help you navigate these choices and find a policy that works for you.
Term vs. whole life insurance FAQs
How long does life insurance last?
Term life policies can last from 10 to 30 years, while whole life insurance lasts your whole life.
Is there a guaranteed death benefit for life insurance?
Yes, both term and whole life insurance policies have a guaranteed death benefit.
Is life insurance taxable?
According to the IRS, death benefit payouts aren't included in gross income and therefore are not taxable. However, any interest you receive is taxable.
Colin Lalley
Insurance Expert
Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness. Colin has a degree in English from the University of North Carolina at Chapel Hill.
Rebecca Shoenthal
Insurance Expert
Rebecca Shoenthal is an insurance editor at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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