Term Life Insurance

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 Once the term expires, you stop paying premiums and the policy is no longer in effect.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.

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Whole Life

  • Level premium and death benefit
  • Low rate of return in exchange for guaranteed growth

Universal Life (UL)

  • Adjustable premium and death benefit
  • The cash value component of the policy earns interest (minus any insurer fees) at a variable rate determined by the insurer
  • You can use the cash value to offset the premium cost

Variable Life

  • Level premium and death benefit
  • You can invest the cash value component among the insurance company’s portfolio of investments
  • Risk of losing cash value due to market performance

Variable Universal Life (VUL)

  • Like universal, there is an adjustable premium and death benefit
  • Like variable, you can invest the cash value component among the insurance company’s portfolio of investments
  • Risk of losing cash value due to market performance

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:

Reason #1

Life insurance is a great way to protect your family during the middle of your life while you’re building up enough savings to “self-insure” in your later years. A term policy is ideal for this sort of use. And it’s affordable for most people who need it.

Reason #2

Permanent life insurance is significantly more expensive than term insurance. When it comes to whole life insurance and other permanent policies, the ones that carry minimal financial risk have a lower rate of return, while those that do carry risk can become too expensive to keep in periods of low interest rates or poor market performance.

How much insurance do you need?

I don't know how much I need

Helpful Resources

Need more info? Visit our Life Insurance Learning Center