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

There are plenty of life insurance options out there, including new variations on traditional coverage, but most people end up deciding between traditional term and whole life policies, each of which has its selling points. Term life insurance is affordable and straightforward but doesn’t last for life, while whole life insurance doesn't expire, but is more expensive. 

Term life insurance is right for most people, since they won’t need coverage in their retirement years, but that doesn't mean it's right for everyone. Whole life insurance is best for people with lifelong dependents or more complex financial planning needs.

What’s the difference between term and whole life insurance?

The main differences between term life and whole life insurance lie in the length of coverage and premium costs. Term life insurance usually lasts 10 to 30 years, then expires, whereas whole life lasts for as long as you keep paying premiums. 

Whole life insurance is much more expensive than term life insurance because of the longer coverage period and because it comes with extra features, like a cash value account that earns tax-deferred interest. Term insurance doesn’t have a cash value, which makes it less complicated.

For most people, the convenience and lower cost of term life insurance make it the best choice. But a whole life policy may be a better fit if you need lifetime coverage or another way to invest outside traditional accounts.

What is term life insurance?

With term life insurance, you pay premiums regularly for a set period. If you die while the policy is active, your beneficiaries get a death benefit payout.

After 20 to 30 years, many people have fewer financial responsibilities and don’t need life insurance anymore. As long as you don’t need coverage into old age, a term policy is simple and cost-effective.

Pros

• Affordable premiums

• Can cancel the policy without any penalty

• No hidden fees, exclusions, or investment risk

Cons

• Expires, so you have to buy a new policy if you still need insurance 

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that stays active for your entire life. Whole life is more complex than term life because of its cash value.

The policy's cash value grows over time at a rate controlled by your insurer. You can use the cash value to take out loans or use it for retirement when the account matures. Some restrictions apply to when you can begin making withdrawals and interest on policy loans.

Pros

• Can be useful for estate planning

• Cash value acts as forced savings 

• Coverage doesn’t expire

Cons

• Higher premiums are difficult to afford long-term

• Other investments offer higher interest rates

• Penalties apply if you cancel coverage

Term life vs. whole life: Coverage comparison

Below is a quick overview of common term and whole life policy differences, including a cost comparison for 35-year-olds.

Cost comparisons for whole vs. term life insurance

Both term life and whole life premiums stay the same for the duration of your policy. Because coverage lasts longer and comes with a cash value, whole life insurance is five to fifteen times more expensive than a comparable term life policy.

The charts below compare the monthly cost of a $250,000, 20-year term policy and a $250,000 whole life policy for a male non-smoker at different ages.

Note that a whole life policy costs as much as 15 times more than term life in the example above for the same death benefit. Visualized another way, the difference in cost is even clearer:

Methodology: Quotes based on policies for male non-smokers in a Preferred health classification, offered by Policygenius in March 2022 from our 10 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI, and Transamerica. Rates are calculated based on a $250,000, 20-year term life insurance policy and $250,000 whole life insurance policy paid up at age 99 for a 35-year-old male non-smoker in a Preferred health classification.

How to choose between whole life and term life insurance

Whether you need a term life or whole life policy depends on your financial needs. 

• 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

• Whole life is right for you if: You want to minimize your estate tax, you want to build cash value, or you have long-term dependents 

Term life insurance is the right life insurance 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.