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The difference between term and whole life insurance can be boiled down to cost and length. Term life insurance is cheaper than whole life and covers you for a set period of time. Whole life insurance typically lasts your entire life and can build cash value, which makes it a more complex and expensive product.
With either policy, your loved ones can spend the payout however they like, such as funeral expenses, mortgage payments or college tuition. But depending on your coverage needs, one type of life insurance may be a better fit than the other.
Term life vs. whole life: Overview
To better understand the difference between term life and whole life, here’s a quick rundown on how each type of coverage works.
Term life insurance
The way term life insurance works is simple: It covers you for a fixed period of time, such as 10, 20 or 30 years, and pays out if you die during the term. If you outlive the term and your coverage ends, your beneficiaries won’t receive any money. Most policies are a type of level term life; the death benefit and insurance premiums are guaranteed to stay the same throughout the term. A decreasing term life policy is slightly different, and less common. The death benefit gets smaller over the length of the term while the premiums stay the same.
Ideally, the length of your term life insurance should match the financial obligation you’re covering. For example, if you're a new parent, you might buy a 20-year policy to cover you until your child no longer relies on you financially. Most life insurance companies sell term life, so it’s easy to find and compare life insurance quotes online.
» MORE: Best life insurance companies
Whole life insurance
Whole life insurance is the most common type of permanent life insurance and typically costs more than term life. This is because most policies offer coverage that matures late in life — at 90, 100 or 120 years old, in some cases. Whole life insurance also has a cash value component. A portion of your premium goes toward the cash value, which can grow over time. Once you’ve built up enough cash value, you can borrow against it or surrender the policy for cash.
Although it’s more complicated than term life, the way whole life insurance works is more straightforward than other types of permanent life insurance. Premiums remain level and the cash value grows at a guaranteed fixed rate. The death benefit is also guaranteed, but be mindful of taking out cash value loans or withdrawals without paying them back. While you’re not required to repay them, your insurer will subtract any outstanding loans or withdrawals from the final death benefit paid out to your beneficiaries.
Many whole life insurance policies are “participating” policies, which means you may earn dividends based on the company’s financial performance. You can use your dividends in a few different ways — including boosting your policy’s cash value.
» MORE: What is a mutual life insurance company?
Key differences between term life and whole life
Cost of term life vs. whole life
Term life is often the most affordable life insurance because it’s temporary and has no cash value. Whole life premiums are much higher because the coverage typically lasts your lifetime, and the policy grows cash value. Here’s how annual premiums compare for term life policy vs. whole life.
Average annual life insurance rates for women
Age at purchase | Policy amount | 20-year term life | 30-year term life | Whole life |
|---|---|---|---|---|
30 | $250,000 $500,000 $1 million | $129 $189 $280 | $182 $293 $468 | $2,026 $4,015 $7,953 |
40 | $250,000 $500,000 $1 million | $179 $283 $480 | $269 $464 $856 | $2,987 $5,937 $11,797 |
50 | $250,000 $500,000 $1 million | $361 $645 $1,130 | $607 $1,119 $2,108 | $4,740 $9,443 $18,810 |
60 | $250,000 $500,000 $1 million | $874 $1,666 $3,125 | Not available. | $7,990 $15,943 $31,810 |
Source for all rates: Quotacy. Lowest three rates for each age and policy type averaged. Valid as of Jan. 7, 2023. Rates are for applicants in the super preferred health class. | ||||
Average annual life insurance rates for men
Age at purchase | Policy amount | 20-year term life | 30-year term life | Whole life |
|---|---|---|---|---|
30 | $250,000 $500,000 $1 million | $147 $224 $350 | $212 $348 $605 | $2,344 $4,652 $9,190 |
40 | $250,000 $500,000 $1 million | $205 $335 $577 | $333 $584 $1,085 | $3,533 $7,028 $13,887 |
50 | $250,000 $500,000 $1 million | $452 $824 $1,531 | $791 $1,480 $2,837 | $5,600 $11,163 $22,133 |
60 | $250,000 $500,000 $1 million | $1,250 $2,361 $4,491 | Not available. | $9,594 $19,150 $38,093 |
Source for all rates: Quotacy. Lowest three rates for each age and policy type averaged. Valid as of Jan. 7, 2023. Rates are for applicants in the super preferred health class. | ||||
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How to choose between term and whole life insurance
Term life is sufficient for most families, but whole life and other forms of permanent coverage can be useful in certain situations.
Choose term life if you:
Only want coverage for a specific period of time. A term life policy can replace your income if you die while you still have major financial obligations, such as raising children or paying off your mortgage.
Want the most affordable coverage. Term life insurance is the least expensive option, especially if you’re young and healthy.
Think you might want permanent life insurance but can’t afford it right now. You may be able to convert your term life policy to permanent coverage at a later date. The deadline for conversion varies by policy, and not all policies offer conversion.
Don’t want to use life insurance to accumulate a cash value. Buying a cheaper term life policy lets you save what you would have paid for a whole life policy, and perhaps invest the money elsewhere.
Choose whole life if you:
Can comfortably afford the higher premiums. Whole life insurance is a lifelong commitment, so you want to make sure you can afford it. If you miss your premium payments, your policy could lapse.
Want coverage that essentially lasts your lifetime. The death benefit from whole life policies typically pays out whenever you die. If you name life insurance beneficiaries on your policy, the payout will go directly to them and not through your estate.
Have a lifelong dependent like a child with disabilities. Life insurance can fund a trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor before setting up a trust.
Want life insurance that builds guaranteed cash value. The cash value of whole life policies grows at a guaranteed rate set by the insurer.
» MORE: Is whole life a good investment?
Still not sure whether you need life insurance? Use our tool below.
Alternatives to term and whole life insurance
If you need lifelong coverage but want more flexibility than whole life provides, consider other types of permanent life insurance:
Universal life insurance.
Variable life insurance or variable universal life insurance.
Indexed universal life insurance.
These other options often have varying costs and features depending on the type of coverage you buy and the performance of your cash value. That can lead to great savings or to unexpected expenses.
As always, discussing your individual needs with a fee-only life insurance consultant is a great first step.
Frequently asked questions
What happens to term life insurance at the end of the term?
Most term life insurance policies are temporary, which means your coverage expires once your term is up. If you still need life insurance, you can purchase a new policy, though you can expect to pay higher rates. There are cases where your coverage may continue, such as if you convert to a permanent life insurance policy before the deadline set by your insurer.
Why is term life insurance cheaper than whole life?
Term life insurance tends to be cheaper than whole life because it offers temporary rather than lifelong coverage and doesn’t build cash value.
Does term life insurance build cash value?
No, term life insurance doesn’t have a cash value. If you want a policy that builds value over time, look into permanent life insurance.
Which is better, whole or term life insurance?
The best life insurance policy for you depends on your needs and budget. Generally, term life insurance is sufficient for most people. You might want to explore whole life insurance if you’ve maxed out your tax-advantaged retirement accounts or if you have a lifelong dependent, such as a child with special needs.
What are the main differences between term and whole life insurance?
Term life insurance is temporary. It offers coverage for a set number of years, like 10, 15 or 20, and pays out a death benefit if the policyholder dies during that period. Whole life insurance typically lasts your whole life and has an added cash value component that earns interest over time.
