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 life and whole life. Term life insurance is simple, easy to understand, and affordable, but doesn’t last for life. Whole life insurance, on the other hand, never expires, but is more expensive and complex than term life.
Term life 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 a useful option for people with lifelong dependents or more complex financial planning needs.
Which of these two policy options is right for you will ultimately depend on your budget, coverage, and financial needs.
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 Banner Life, Brighthouse Financial, Corebridge 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 06/01/2023.
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 life 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 life 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. Whole life insurance could also be a good option for you if you’re already maximizing your contributions to tax-advantaged accounts like a Roth IRA or a 401(k) and are seeking another investment option.
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 life 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 life 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 life and whole life policies offer similar death benefit payouts. Minimum coverage amounts are typically around $100,000 for traditional term life or whole life, and can go up as high as $3 million or more.
For both types of policies, unless you have living benefits, your beneficiary won’t receive any financial benefit until you die.
Cash value
Term life insurance doesn’t have a cash value. By contrast, most 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 life.
Canceling a policy
You can cancel your life insurance policy at any time, but canceling a term life 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.
Common choices to cancel a whole life policy include either surrendering your policy for the cash value, or opting for a lower death benefit that’s already covered by your paid premiums.
Risks
The main risks associated with both term life 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 down the road.
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 or paying surrender fees if you can’t afford your monthly premiums and let your policy lapse.
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.
The goal of many term life insurance policies is to provide coverage until retirement, at which point you likely have fewer financial responsibilities and are able to self-insure.
If you die during your term, your beneficiary will receive the death benefit — typically a lump sum of money — tax-free.
Pros and cons of term life insurance
Pros:
Affordable: Term life 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 20-year term life policy with a $500,000 payout. By comparison, a whole life policy with the same payout would cost the same person $540 per month.
Straightforward: Term life policies come with few tax implications and 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:
Expires: Term life doesn’t provide lifelong protection.
Has no cash value component: Term cannot be used as an investment strategy.
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 at a fixed rate over time.
Pros and cons of whole life insurance
Pros:
No expiration date: Whole life insurance provides coverage protection for life.
Cash value: The cash value component included in whole life policies earns interest over time.
Cons:
Cost: Whole life insurance is significantly more expensive than term life. A healthy 35-year-old would pay $540 per month for a whole life insurance policy with a $500,000 payout. By comparison, a 20-year term life policy with the same payout would cost the same person $28 per month.
Investment returns: Whole life insurance offers lower returns than other investment options.
Common types of whole life insurance policies
While all types of whole life insurance share some features — like the fact that they never expire — each type has elements that make it unique.
The main differences between all whole life insurance types have to do with the amount of coverage you can get and their application process.
Whole life insurance. A standard whole life insurance policy is usually for a face amount between $100,000 and $3 million. When you apply, you’ll usually have to take a medical exam, and your overall health will impact how much your life insurance costs.
Final expense insurance. Final expense insurance — sometimes called burial insurance — is designed to cover end-of-life costs, like funeral expenses or medical bills. The face value of the policy is usually between $5,000 and $40,000. You won’t have to take a medical exam to get this type of policy, but if you have a complex medical profile, you’ll likely pay a higher rate. Final expense policies are only available to people who are at least 45 years old.
Simplified issue life insurance. Simplified issue is a type of final expense insurance. A medical exam isn’t required to apply, but you do need to meet certain health criteria in order to get this type of policy.
Guaranteed issue life insurance. Guaranteed issue life insurance is also a type of final expense insurance, but you don’t need to meet any health criteria in order to apply. This type of life insurance is ideal for people who have multiple or complex health conditions, because virtually everyone is able to get approved.
Term vs. whole life insurance: Cost comparison
Whole life is significantly more expensive than term life. A non-smoking 35-year-old will pay $28 per month for a 20-year term life policy with a $500,000 death benefit payout, or $540 per month for a whole life policy with the same payout.
The average monthly sample rates below will show you how other term life rates and whole life rates compare. Sample rates are for non-smokers who 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 life vs. whole life rates for a $500,000 policy
Age | Gender | $500,000 20-year term life insurance policy | $500,000 30-year term life insurance policy | $500,000 whole life insurance policy |
25 | Female | $20.92 | $31.02 | $351.00 |
Male | $26.98 | $39.57 | $403.00 | |
35 | Female | $25.56 | $39.35 | $489.50 |
Male | $30.52 | $46.78 | $591.50 | |
45 | Female | $48.14 | $80.86 | $744.50 |
Male | $61.19 | $105.62 | $1,361.50 | |
55 | Female | $110.51 | $216.56 | $1,219.50 |
Male | $152.65 | $311.77 | $1,462.50 |
Methodology: Average monthly term life insurance rates are for male and female non-smokers with a Preferred health classification buying a 20-year or 30-year $500,000 term life insurance policy. Term life insurance averages are based on a composite of policies offered through Policygenius from Banner Life, Brighthouse Financial, Corebridge 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 whole life insurance rates are calculated for non-smokers in averaged Preferred Plus and Standard health classifications, 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 06/01/2023.
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How to choose between term and whole life insurance?
If you’re 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 have long-term financial obligations, or you’re already maximizing contributions to your 401(k) or Roth IRA and looking to diversify investments, 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.
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 life 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
Alternatives to term and whole life insurance
Term life and whole life are two of the most popular types of life insurance policies because they meet the most common coverage needs of most people. But if you have other life insurance plans, you might want to consider different options.
The following types of policies can be an alternative to term life, whole life, 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 is a type of permanent life insurance that comes with fixed premiums, minimal cash value, and a guaranteed death benefit.
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.
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.
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.
Joint life insurance is a policy that covers two people. Most commonly, the joint policyholders are married or domestic partners, but they can also be business partners. In most cases, it’s better for each individual to have their own personal policy.
→ Learn more about the difference between term vs. permanent life insurance
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.
Can you convert a term life insurance policy to whole life?
Yes, many term life insurance policies come with the option to convert to whole life — or another permanent life insurance product — before the end of your term.
