Term life insurance vs. whole life insurance: an overview
If you’re shopping for life insurance, you’re most likely trying to decide between two main policy options: term and whole life. Term life insurance is simple, easy to understand, and affordable, but doesn’t last for life. While whole life insurance, on the other hand, never expires, but is more expensive and complex than term.
Term insurance is the most convenient policy option for people who’re simply looking for a way to provide a financial safety net to their loved ones in case they die. But that doesn’t mean term life is right for everyone. Whole life insurance is best for people with lifelong dependents or more complex financial planning needs.
Continue reading to learn more about the differences between term and whole and decide which type of life insurance is right for you.
What is term life insurance?
Term is a type of life insurance that provides financial protection for your family over a fixed period of time, typically lasting 10 years to 30 years. If you die during that period, your beneficiary will receive the death benefit — typically a lump sum of money — tax-free.
What are the benefits of term life insurance?
Term life insurance covers almost any type of death caused by illness or an accident and is accessible to almost anyone, even if you have a pre-existing condition or you’re on a budget.
Term is more affordable than other types of life insurance and can provide a financial safety net to your loved ones without complicated tax, premium or payout complications.
What are the drawbacks of term life insurance?
The main drawback of term life insurance is that it has an expiration date. If you still need life insurance by the time your term coverage expires, you’ll have to buy a new policy.
Term also doesn’t come with a cash value component that other types of policies have. If you’re a high earner seeking alternative investment options, or you have dependents who will need long-term care, a term policy is probably not the best fit for you.
Term life insurance pros & cons
Pros:
Affordable: Term is cheaper than other options, so you can get coverage at a manageable price. A healthy 35-year-old, for example, can pay as little as $28 per month for a term life policy with a $500,000 payout and a duration of 20 years.
Straightforward: Term life policies don’t come with complex tax implications or restrictions.
Coverage only when you need it: Term life insurance provides financial protection during your productive years, when you have multiple financial obligations, like paying a mortgage or putting your children through college.
Cons:
Common types of term life insurance policies
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that provides coverage for your entire life. Like all life insurance products, whole life pays a tax-free death benefit to your beneficiaries upon your death. But it also has a cash value that earns interest over time.
What are the benefits of whole life insurance?
Whole life insurance doesn’t expire so your beneficiaries will receive the death benefit payout regardless of when you die, as long as you’ve paid your premiums to keep your policy active.
The cash value that whole life policies have builds interest over time — and offers a guaranteed rate of return that grows at a fixed rate. Unlike your death benefit, you’re able to access your cash value while you’re still alive.
What are the drawbacks of whole life insurance?
Whole life insurance policies are five to 15 times more expensive than term life policies. If you take out a whole life policy and then find you can’t afford to keep it, you risk leaving your family without protection.
As an investment vehicle, one disadvantage of whole life is that other investment options offer higher rates of return.
Whole life insurance pros & cons
Pros:
Cons:
Cost: Whole life insurance is five to 15 times more expensive than term. Following the previous example, a healthy 35-year-old would pay $540 per month for a whole life insurance policy with a $500,000 payout.
Investment returns: Whole life insurance offers lower returns than other investment options
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Term life vs. whole life insurance: Coverage comparison
The length of your coverage, the premium costs, and the cash value component are the main differentiating factors between term and whole life insurance policies. Here’s what to consider when shopping for the right policy for you.
Policy duration
Term life insurance policies last only for a set period of time — usually, between 10 years and 30 years — while whole life policies never expire.
If you’re only seeking temporary coverage while you face important financial obligations like paying down a mortgage or sending your children to college, term can be a good fit for you.
If you have long-term financial obligations or dependents who will need lifelong support, a whole life policy can provide the permanent coverage protection you need.
Premiums
Life insurance premiums, regardless of policy type, can usually be paid in monthly or annual installments. Consider your budget and other financial considerations and pick the payment option that best suits your needs.
When it comes to term life, level term policies where the premium — and the death benefit — remain the same over the life of the policy are the most common. Other less common term policies — called return-of-premium life insurance — give you the option to get your premiums refunded if you outlive your coverage, but they’re usually more expensive.
As for whole life, some policies — called single premium whole life insurance — allow you to fund the policy by one initial premium payment in a lump sum. This option allows policyholders who can afford it the possibility to make just one payment and have coverage for life.
Payouts
Both term and whole policies offer similar death benefit payouts. Minimum coverage amounts are typically around $100,000 for traditional term or whole life, and can go up as high as $2 million or more.
Cash value
Term life insurance does not have a cash value. By contrast, whole life insurance has a cash value that earns interest over time and is separate from the death benefit. This is one of the main reasons why whole life insurance is several times more expensive than term.
Canceling a policy
You can cancel your life insurance policy at any time, but canceling a term policy is usually easier and has fewer potential implications than canceling a whole life policy.
The easiest way to cancel a term life insurance policy is to stop paying your premiums. You can also contact your insurance provider to request that your policy be canceled. No matter what option you choose, there’s no penalty or fee for ending a term life insurance policy.
Canceling a whole life insurance policy takes more than just stopping payments. Your options will depend on how long you’ve owned the policy and your insurance company’s rules, but there are usually three choices:
Cash out the policy’s cash value. You might have to pay fees, penalties and/or taxes, depending on when you cancel the policy. These might be subtracted from your cash value, if it’s grown large enough by then to cover them. Otherwise, you’ll have to pay them out of pocket.
Let the policy lapse. Some insurance companies might cash out your policy if you stop making payments, but others might use your cash value to fund your premiums if you stop paying. In either scenario, you can be charged surrender fees and taxes.
Opt for reduced paid-up insurance. This option allows you to stop paying premiums in exchange for a lower death benefit. In this case you won’t be really canceling your policy, but you’ll be able to stop making payments and still have access to a smaller coverage that will last for life in exchange for the premiums you already paid.
Risks
The main risks associated with both term and whole life insurance have to do with their duration and cost. Term life is affordable but lasts only for a set period of time. If your policy expires and you still need coverage, you risk having to pay higher premiums for a new policy or for having to convert it into a permanent policy.
Whole life policies provide coverage for life, but because they’re several times more expensive than term, they’re more difficult to maintain for the whole duration of the policy. You may risk losing coverage if you can’t afford your monthly premiums and let your policy lapse.
Comparing life insurance coverage options at a glance
Features | Term life insurance | Whole life insurance |
Provides lifelong coverage | No | Yes |
Limited length of coverage | Yes (up to 40 years) | No |
Cost* ($500,000 coverage amount) | $28/month for a 20-year term policy | $540/month for a whole life policy |
Guaranteed death benefit | Yes | Yes |
Guaranteed cash value | No | Yes |
Can take loan against cash value | No | Yes |
Premiums stay fixed | Yes, in most cases | Not always |
Pays annual dividends | No | Yes, in some types of policies |
Can cover funeral costs at any time | No, policy may expire before you die | Yes |
Policy will lapse if you stop paying premiums | Yes | Not always, depends on when you stop paying |
*Methodology: Average monthly estimated term life insurance rate is for male and female non-smokers with a Preferred health rating buying a 20-year, $500,000 policy. Term life insurance averages are based on a composite of policies offered by Policygenius from AIG, Banner Life, Brighthouse Financial, Foresters Financial, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, Symetra, and Transamerica. Life insurance rates may vary by insurer, term, coverage amount, health class, and state. Average monthly estimated whole life insurance rate is calculated for non-smokers in a Preferred Plus and Standard health classification, obtaining a whole life insurance policy payable within 99 years from MassMutual. Individual rates will vary as specific circumstances will affect each customer's rate. Not all policies are available in all states. Rate illustration valid as of 01/01/2023.
Term vs whole life insurance: Cost comparison
Term is one of the most affordable types of life insurance coverage options on the market because it offers an uncomplicated death benefit and lasts only for a set period of time. Whole never expires and comes with a cash value in addition to the standard death benefit that can be used as an investment option. These features make whole life five to 15 times more expensive than term.
The average monthly sample rates below will show you how term and whole rates compare. Sample rates are for non-smokers who may fall into the Preferred health class — usually reserved for people with one or two minor health conditions or within the insurance company's preferred range for height-to-weight ratio — seeking a life insurance policy with a duration of 20 years, 30 years, or whole life.
Term vs. whole life insurance costs for a 35-year-old female
Coverage amount | 20-year term | 30-year term | Whole |
$100,000 | $10.85 | $14.33 | $103.50 |
$250,000 | $16.32 | $23.56 | $247.00 |
$500,000 | $25.43 | $38.96 | $489.50 |
$750,000 | $35.15 | $55.45 | $732.00 |
$1,000,000 | $42.60 | $69.20 | $964.00 |
Term vs. whole life insurance costs for a 35-year-old male
Coverage amount | 20-year term | 30-year term | Whole |
$100,000 | $12.12 | $16.48 | $124.00 |
$250,000 | $18.48 | $27.53 | $298.50 |
$500,000 | $30.15 | $46.42 | $591.50 |
$750,000 | $42.24 | $66.64 | $885.50 |
$1,000,000 | $51.70 | $83.14 | $1,165.50 |
Term vs. whole life insurance costs for a 45-year-old-female
Coverage amount | 20-year term | 30-year term | Whole |
$100,000 | $16.35 | $23.73 | $154.50 |
$250,000 | $28.19 | $45.09 | $374.50 |
$500,000 | $47.62 | $79.87 | $744.50 |
$750,000 | $68.44 | $116.81 | $1,115.00 |
$1,000,000 | $86.69 | $148.61 | $1,474.50 |
Term vs. whole life insurance costs for a 45-year-old-male
Coverage amount | 20-year term | 30-year term | Whole |
$100,000 | $19.97 | $31.77 | $193.00 |
$250,000 | $34.95 | $59.09 | $456.50 |
$500,000 | $60.54 | $105.07 | $909.00 |
$750,000 | $87.81 | $154.61 | $1,361.50 |
$1,000,000 | $112.95 | $198.29 | $1,774.00 |
Term vs. whole life insurance costs for a 55-year-old-female
Coverage amount | 20-year term | 30-year term | Whole |
$100,000 | $31.52 | $59.84 | $249.50 |
$250,000 | $59.69 | $117.07 | $612.00 |
$500,000 | $108.31 | $211.44 | $1,219.50 |
$750,000 | $159.52 | $314.22 | $1,827.50 |
$1,000,000 | $207.24 | $410.66 | $2,424.50 |
Term vs. whole life insurance costs for a 55-year-old-male
Coverage amount | 20-year term | 30-year term | Whole |
$100,000 | $42.99 | $82.82 | $305.00 |
$250,000 | $82.46 | $164.85 | $733.50 |
$500,000 | $150.12 | $307.26 | $1,462.50 |
$750,000 | $222.24 | $457.96 | $2,191.50 |
$1,000,000 | $283.12 | $599.82 | $2,605.50 |
Methodology: Average monthly estimated term life insurance rates are for male and female non-smokers with a Preferred health rating buying a 20-year or 30-year, $100,000, $250,000, $500,000, or $1 million term life insurance policy. Term life insurance averages are based on a composite of policies offered by Policygenius from AIG, Banner Life, Brighthouse Financial, Foresters Financial, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, Symetra, and Transamerica. Life insurance rates may vary by insurer, term, coverage amount, health class, and state. Average monthly estimated whole life insurance rates are calculated for non-smokers in a Preferred Plus and Standard health classification, obtaining a whole life insurance policy payable within 99 years from MassMutual. Individual rates will vary as specific circumstances will affect each customer's rate. Not all policies are available in all states. Rate illustration valid as of 02/01/2023.
What to consider before buying term or whole life insurance
What do you need life insurance coverage for, and for how long are two of the main questions you should consider when choosing between term and whole life policies. Other relevant considerations that will impact the type, length, and amount of the life insurance policy you may need include:
Your age
Your health
You family's financial needs
Any pre-existing conditions and other long-term health expenses
Financial obligations, like a mortgage
Retirement plans
Children's current and future costs, including college tuition
Funeral expenses
Estate planning taxes
Existing wills and trusts
Special beneficiaries, like relatives who need long-term care
Other existing life insurance policies
How to choose between whole life and term life insurance
Whether you need a term life or whole life policy will depend on your financial situation, your budget, and your coverage needs.
Who is term life insurance a good fit for?
Term life is right for you if you want an affordable way to leave a death benefit behind to financially support your loved ones and you expect to self-insure in the future.
Who is whole life insurance a good fit for?
Whole life is right for you if you want to minimize your estate tax, want to build cash value, or have long-term dependents.
Term life insurance is the right type of policy in most cases because it offers the same amount of death benefit as whole life insurance for a fraction of the price. If you’re still unsure, a Policygenius agent can help you compare the best companies and decide which type of policy is right for you.
Can I convert life insurance policies?
Most term life insurance policies can be easily converted into a permanent life policy — many of them include a rider that allows you to do so. Converting a whole life insurance policy into a term option is not as easy, but you have options.
A financial advisor or insurance agent can walk you through different alternatives and help you decide the best conversion solution for your policy.
How to switch from term to whole life insurance
When shopping for term life insurance, make sure that your policy includes a convertible term rider. This is an add-on that allows you to convert your term policy into a permanent one without having to go through additional underwriting.
Each insurance company and policy have their own rules and requirements for term conversion. Policy riders usually have specific conversion periods — for example, before the term ends or the policyholder turns 70, whichever comes first.
They also detail the kind of products you can convert your policy into — common options include whole and universal life insurance.
And some insurers let you convert just part of your policy to permanent coverage.
How to switch from whole to term life insurance
You can’t really convert a whole life insurance policy into a term policy, but if your policy’s cash value has grown large enough, you could use it to fund your policy through two potential options.
Extended term: In this case, you can use the cash value accumulated in your whole policy to pay the premiums for a limited period of time. Once the cash value is completely spent, your policy will lapse. If you only need to keep your coverage for a brief period of time, this can be an option for you.
Reduced paid-up: In this option, the cash value of your policy will be turned into a single premium, which will pay for your coverage, keeping it as a permanent policy so it will never expire. However, the death benefit on your policy will be reduced accordingly, and most likely drastically, to match your premium. If you no longer have financial obligations to cover and are only looking for a policy that can help pay for final expenses, this can be a solution for you.
Term vs. whole: other life insurance options
Term and whole are two of the most popular types of life insurance policies because they meet the most common coverage requirements of most people. But if you have specific needs you might want to consider other options.
The following types of policies can be an alternative to term, whole, or both. Working with an independent broker on your life insurance application is the best way to find the right coverage for you at the right price.
Guaranteed universal life insurance
Guaranteed universal life insurance is a type of permanent life insurance that comes with fixed premiums, minimal cash value, and a guaranteed death benefit. It’s one of the most affordable and convenient policy types you can purchase to get lifelong coverage — and a good alternative to term or whole if you’re looking for a simple permanent coverage option.
Indexed universal life insurance
Indexed universal life insurance (IUL) comes with a cash value that earns interest and lets you adjust your death benefit or use your cash value to pay your premiums — similar to other universal life insurance options. The interest rate is based on an index chosen by the policyholder.
IUL is more expensive and complicated than whole, but its cash value has the potential to see bigger gains compared to other permanent options.
Variable life insurance
Variable life insurance is a type of permanent coverage that allows you to invest the money from your cash value in various funds offered by the insurance company, including mutual funds.
The cash value amount, however, is not guaranteed. While you may earn more interest than you would with a whole life insurance policy, you’ll also bear the investment risk if the fund you picked underperforms.
Variable universal life insurance
Variable universal life insurance (VUL) is a type of permanent coverage that comes with flexible premiums, an adjustable death benefit, and multiple ways to invest your cash value. As with other permanent options, it has the potential to see bigger gains than a standard whole life policy, but is also riskier — and more expensive than term.
Burial insurance
Burial insurance, also known as final expense insurance, is designed to pay a small death benefit to your family to help cover end-of-life expenses. Unlike traditional term or whole life insurance policies, which are meant to replace decades’ worth of income, burial insurance is usually suited to older adults who want a smaller policy to cover their funeral costs.
If you don’t have any other financial obligations to cover and are only looking for a way to fund final expenses, burial insurance can be a good alternative to term or whole for you.
Joint life insurance
A joint life insurance policy covers two people. Most commonly, the joint policyholders are married or domestic partners, but they can also be business partners.
Most joint life insurance policies are permanent life insurance policies. They can be an alternative to either whole or term if one of the two people doesn’t qualify for coverage, or if buying two separate policies is out of budget.
→ Learn more about the difference between term vs. permanent life insurance
Term vs. whole life insurance: Which one is better?
The answer to this question will be different for everybody — life insurance is not a one-size-fits-all solution. If you’re just looking for a simple and affordable way to provide your loved ones with a financial safety net if you die, a term life policy may be a good option for you. But if you’re a high earner or have long-term financial obligations, a whole life policy may suit your needs better.
The best way to find the right type of policy for you is to work with an independent broker. At Policygenius, our experts are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice.
Frequently asked questions
What’s the difference between term life and whole life?
Term life offers affordable coverage for a set period of time, usually 10 years to 30 years. Whole life is a lot costlier because it lasts your entire life and has an investment-like component.
What happens to term life insurance at the end of the term?
Term life insurance policies expire at the end of the term. If you don’t need to keep coverage, you can let your policy expire. If you still need coverage, however, you can convert it into a permanent policy, renew your policy at a higher premium, or apply for a new policy.
Can you cash out a term life insurance policy?
No, you can’t cash out a term life insurance policy because this kind of policy doesn’t have a cash value.
Can you cash out a whole life insurance policy?
Yes, you can cash out a whole life insurance policy. Every whole life policy has a cash surrender value, which is the cash value amount minus fees and penalties. Penalties for cashing out apply during the surrender period, which can last a decade or more. Interest earnings are also taxed as income if you cash out.
How long do I need life insurance?
Your term life insurance policy should last as long as your financial obligations and outstanding debts — for most people that is between 20 and 30 years. If you have long-term financial obligations or dependents who will need lifelong care, you might want to consider a permanent life insurance policy, which never expires, instead.
Should I buy term or whole life insurance if I have a special needs dependent?
Whole life insurance never expires, which makes it a good fit for people who have dependents who need long-term care.
