Term vs. whole life insurance | Which one should you buy? | finder.com

Term vs. whole life insurance

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We break down each type in plain English.

Life insurance can seem complicated. And when you’re choosing between term and whole life insurance, the decision can feel overwhelming.

Take a deep breath: We’re here to help. If you’re confused by all the fancy insurance terms out there, this guide will clear the air. Here’s the difference between term and whole life insurance, explained simply.

Term vs. whole life

Term life insuranceWhole life insurance
Usually easier to buy
More affordable
Choose how long your policy lasts
Lasts for life
Premium is typically fixed
Includes cash value
May be able to get a policy with no health exam
Need a crash course on life insurance?

Before deciding between term or whole life insurance, familiarize yourself with the basics of life insurance. Learn everything you need to know in our handy guide to life insurance.

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What is term life insurance?

Term life insurance covers you for a specified period of time, typically with the option of renewing after that term.

Average terms come in increments of five — for instance, 5, 10, 15, 20, 25 or 30 years. Though you’ll find the rare company offering tailored terms, you likely won’t be able to sign up for a 12-year policy.

Here’s what you should know about term life insurance

  • It offers death benefits only.

    Whole life insurance, meanwhile, offers death benefits and an extra investment account called cash value. We’ll talk more about this in a bit.

    Definition: The death benefit is the money paid out by a life insurance policy when the policyholder dies. This money is paid to the beneficiaries — the people chosen to receive the death benefit.

  • It’s usually less expensive than whole life insurance.

    Why? Simple: Your insurer is betting you’ll still be alive at the end of the policy term. If that’s the case, it won’t have to pay up. Your insurer saves money and charges you less.

  • You may be able to renew your coverage after your term ends.

    Check with your provider to see if this is possible. If you renew your coverage, you’ll probably pay a higher premium.

    Definition: Your premium is the money you pay to keep your insurance policy active. Usually, you’ll pay it monthly. However, many insurers will give you a discount if you pay it annually.

  • You can get term life insurance without a health exam.

    However, your premiums will probably be higher because your insurer has no information about your health.

  • Your premium may change depending on the type of insurance you buy.

    There are three types of term life insurance: level term, decreasing term and annual renewable term insurance.

    Your death benefit will…Cost of your premium
    Level term insuranceStay the same throughout the term.Your premium may:

    • Stay the same throughout the term
    • Stay the same for just a while
    • Or increase
    Decreasing term insuranceDecrease over the term.Premium usually stays the same throughout the term.
    Annual renewable term insuranceStay the same throughout the term.Your premium increases every year.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance — meaning it gives you lifelong coverage.

There are several types of permanent life insurance, including:

  • Variable life insurance
  • Universal life insurance
  • Variable-universal life insurance
  • Survivorship life insurance

Like term life insurance, whole life insurance offers death benefits. However, whole life insurance includes an investment account — the cash value component.

Cash value explained

Each time you pay your insurance premium, your payment is split between your death benefit and your policy’s cash value.

The money you pay toward the cash value goes into an investment account. Over time, those dollars will grow tax-deferred — that is, it won’t be taxed until you withdraw it.

Is the cash value in a whole life policy worth it?
Why take out a cash value policy? One reason is because your cash value will grow with compound interest.

Here’s the thing: It takes a long time for your cash value to grow. It probably won’t be substantial until at least 12 to 15 years. So, it might make sense to take out a cash value policy while you’re young. This way, you’re more likely to have an investment account you can rely on when you’re older.

Another dimension to consider is your other investments. If you have a long way to go before maxing out your retirement accounts — like a 401(k) or IRA — a cash value policy may not be the best investment for you right now. Consider focusing on your current investments before choosing whole life insurance.

Here are a few options you may have to leverage your cash value:

  • Take out a life insurance policy loan.

    You’ll receive a loan from your insurer, and your policy’s cash value serves as collateral.

  • Collect it all.

    You can end your life insurance policy early and collect your policy’s entire cash value. If you choose this option, you give up your death benefit, which means your beneficiaries won’t receive money when you pass away.

  • Pay your premium.

    You may be able to make insurance payments from your cash value. To do this with whole life insurance, your policy must usually be paid up.

What does it mean when a policy is “paid up”?

If your policy is paid up, you won’t have to make premium payments because your insurer draws your premium from your cash value.

“Paid up” doesn’t necessarily mean you never have to make another premium payment. Depending on your policy, you may be required to pay your premium again.

What you should know about whole life insurance

  • You usually need to have a health exam.

    Since your insurer will cover you for life, it wants an accurate assessment of your health.

  • You may be able to purchase insurance without having a medical exam.

    This is no-medical-exam life insurance, also known as simplified issue. It typically comes with higher premiums. Also, you’ll probably have a death benefit below $50,000.

  • Your premium almost always stays the same.

    With some whole life insurance policies, you’ll pay lower premiums early on and higher ones later.

  • At the beginning, it’ll be more expensive than term life insurance.

    In the long run, however, it could save you money compared to term life insurance.

Which type of insurance should I buy?

Now that you know the difference between term life and whole life insurance, here are a few factors to consider before making your choice.

Always understand your policy before you buy insurance. Take your time before making a decision, and do your research before signing any agreement.

Consider buying term life insurance if…

  • You’re not ready to lock in your life insurance forever.

    With term life insurance, you can choose how long you want it to last.

  • You want an affordable option right now.

    Term life insurance generally costs less than whole life insurance — at least at the beginning. You might be surprised by the cost, which could be as little as $30 or $40 a month.

  • You want coverage only for the years you’re paying the bills.

    You may not need a large death benefit after your kids are moved out or you’ve paid off your mortgage. Getting term life insurance means you can reevaluate your policy closer to its expiration date.

  • You want a straightforward life insurance policy.

    Term life insurance is relatively easy to understand. Whole life insurance can be more complicated, as you’ll want to evaluate it against other types of permanent life insurance.

Consider buying whole life insurance if…

  • You’re young and healthy, and your family has a history of serious diseases.

    It may be a good idea to lock in your premium while you have no health complications. With a serious illness, your premium will increase significantly.

  • You don’t think you have the discipline to invest on your own.

    A term life policy might save you money, which you can put in your own investments. However, you must grow your funds yourself or hire someone to do it for you. You’ll pay higher average premiums for a whole life policy, but your insurer will take care of the investing.

  • You’re getting older.

    Many experts recommend considering whole life insurance as you near the age of 50. You may still be healthy and receive lower premiums. As you get older — and potentially develop health conditions — you may pay higher premiums.

Bottom line

When choosing between term and whole life insurance, never feel you have to rush into a decision. Carefully analyze your financial future: bills, family situation and health.

Term life insurance can be helpful if you have a solid plan for how you’ll cover your obligations when your policy expires. If you think your premiums may increase significantly in the future, it may be worth spending more on whole life insurance.

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