Term vs Whole Life Insurance

The two types of life insurance

There are dozens of life insurance products that are fine-tuned for specific target markets, but they all fall into two broad categories: Term and Permanent.

Term life insurance

"Term" is basic life insurance, the kind you’d probably think of if someone asked you to describe the concept. You pay a premium and in return the insurer guarantees to pay your beneficiary a lump sum of money if you die while the policy is in effect.

Term policies are sold for specific lengths of time (called the “term”), usually between 10 and 30 years. Once the term expires, you stop paying premiums and the policy is no longer in effect.

Pros

• Term is the most affordable life insurance you can buy.
• Term policies are easy to understand, so you don’t have to worry about hidden fees, exclusions, or risks.
• You can cancel a term policy before it expires.

Cons

• When the policy expires, so will your coverage.
• If you still want to be insured you’ll have to either shop for a new policy or convert the policy into a permanent version.

Permanent life insurance

Permanent life insurance never expires before your death (so long as you pay the premium), and it includes a “cash value” component that grows (or in some cases shrinks) over the life of the policy.

This cash value means you can do things like borrow against your policy or cancel the policy for part of the cash value after a period of time.

Pros

• It can be useful as part of a highly customized personal finance or estate planning strategy (e.g., if you have a lot of money and other assets to work with).

Cons

• It’s far more expensive than term insurance.
• Because of the cost, people frequently buy less coverage than they actually need.
• It’s more complicated to buy because there are lots of ways to customize the policy for your specific goals.
• Depending on the type of permanent policy, you could see your death benefit shrink and/or premiums rise over time, or the cash value portion could decrease.

The four types of permanent life

Read more about the types of permanent life insurance and their main features...

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*All permanent policies can be surrendered for their current cash value after a certain number of years, at which point the insurer will pay the accumulated cash value minus any loans and fees.

Which type should I buy?

Unless you’re really wealthy, have an unusual financial situation, or are nearing retirement, you’re almost always better off buying term and investing the rest of your money elsewhere for a couple of reasons: