Term vs. Whole Life Insurance: Differences & How to Choose

Life insurance is one of the pillars of personal financial planning. For many families, it provides a crucial safety net in the unfortunate event of a breadwinner’s passing. A life insurance policy’s death benefit can help survivors continue to make mortgage, car, and other loan payments and ensure that children have the opportunity for higher education. A family with two breadwinners needs life insurance on both, and a non-employed adult who manages the household also should have significant coverage.

If you’re shopping for life insurance, you’ve likely come across the labels “term life” and “whole life.” These describe different types of policies available. While both varieties provide that safety net, they also have some essential differences you should understand.

Key differences between term and whole life insurance

Here are some details to consider.

Term life insurance benefits

Significantly cheaper

Term life insurance is often dramatically cheaper than whole life insurance. According to a June 2023 study by Policygenius, the average term life insurance cost is approximately $30 per month for a healthy 35-year old seeking $500,000 in coverage and a 20-year term. Another June 2023 study by Policygenius shows that the average cost of whole life insurance for the same healthy 35-year-old ranges to $571 per month.

That’s not a typo! Term life insurance often costs just a fraction of whole life insurance.

Easier to understand

If you have a good understanding of how car, renters, or homeowners insurance works, then term life insurance should be pretty easy to grasp. You pay a premium based on the amount of coverage you buy and other factors. The insurance company pays if certain conditions are met (which, in the case of life insurance, means you pass away). The recipients of the payment are beneficiaries you must name in the policy. The policy stays in force for a fixed term as long as you make your payments on time.

Some of this applies to whole life insurance as well. But the cash value component of whole life can often make things more complicated. We’ll cover this later in the article.

Premiums do not vary throughout the life of the policy

Term life insurance premiums are based on various factors, including your age, health, length of the policy term, and size of the death benefit. But once the premium amount is calculated, it remains "locked in" for the policy's life—even for terms up to 30 years—according to Haven Life. This makes term life insurance easy to account for in a budget.

Term life insurance drawbacks

Policy expires after a set term

Unlike a whole life insurance policy, which remains in force until the policyholder’s death, a term life insurance policy has a set term. Everyday Life, for example, offers term life insurance with 10, 15, 20, and 30-year terms. You choose the term that’s right for you when purchasing the policy. So if you want to ensure your newborn has a financial safety net through the time they become an adult, you might select a 20-year term.

The drawback is that the term could end with your never using the coverage after paying years of premium. (Perhaps that's not a bad thing, as it means you'd still be alive!)

No cash value component

Term life is simply insurance. If you’re looking for financial protection for your family in case of your death, you’ll get that with a term life policy.

What you won’t get, however, is the broader package of financial benefits that comes with the cash value component of a whole life policy. We’ll explore these benefits below.

Whole life insurance benefits

Policy stays in force throughout policyholder’s lifetime

Whole life is a form of “permanent” insurance. Once you buy a policy—provided you keep up with your premium payments—it remains in force for the rest of your life.

This can be useful because, let's face it, life isn't exactly predictable. Your family's financial needs 20 or 30 years from now could differ significantly from what you expect. A whole life policy ensures you’ll still have coverage no matter where you are in life.

Premium does not vary

The premium for a whole life policy is typically calculated at the policy’s inception and remains set. This is similar to a term life policy and makes whole life insurance easy to budget for.

Cash value component can be a valuable financial tool

Whole life includes a cash value component. With cash value, a portion of your monthly premium is set aside and grows at a guaranteed rate set by the insurance company. Once the cash value reaches a certain threshold, you can borrow or withdraw that money. These loans and withdrawals are typically tax-free (however, consult with a certified tax preparer to understand the full implications of accessing these funds).

You can also access the cash value if you surrender (cancel) the policy. According to Ladder Insurance, you'll pay a fee or penalty, and your beneficiaries will, of course, not be paid a death benefit.

Whole life insurance drawbacks

Much more expensive

Insurance companies typically charge significantly higher premiums for whole life insurance than term life to account for the lifelong policy term and the cash value component. As noted earlier, recent studies show whole life insurance average premiums to be nearly 20 times higher than average term life premiums.

Outstanding loans will be deducted from the death benefit

The ability to take out loans against the cash value component adds functionality and flexibility to a whole life policy. However, if those loans remain unpaid at the time of your passing, the balance (including interest) will be deducted from the policy’s death benefit, according to Ethos Insurance.

Say, for example, you have a whole life policy with a $1 million death benefit. You borrow $50,000 against your policy’s cash value, then pass away without having repaid that loan. Your beneficiaries will then receive a $950,000 death benefit payout.

Term life insurance offers fast, easy and affordable financial protection for your loved ones. Get Ethos Term Life Insurance with a 100% online and hassle-free process which makes it easy to apply.

Beneficiaries usually don’t receive cash value

You could build up quite a nest egg through a whole life insurance policy’s cash value. Unfortunately, unlike with other investment accounts, your beneficiaries will not receive this money upon your passing. Your beneficiaries receive only the death benefit, while the insurance company keeps the cash value.

According to Experian, it may be possible to increase the death benefit using money in your cash value. A financial planner can help you understand your options.

More difficult to understand

A whole life insurance policy is a hybrid, combining both insurance and investment components. Because of this, whole life insurance is typically more challenging to understand than term life.

Adding to the complexity is the fact that there are additional options for cash value insurance. According to Guardian Life, these include universal life insurance, variable life insurance, and indexed life insurance. Each policy type structures its cash value differently, offering different levels of financial risk and reward. So if you’re in the market for insurance with a cash value component, you may want to understand all of these options.

How to choose between term and whole life insurance

Even with an understanding of the differences between term life and whole life insurance, choosing a policy can be challenging. An independent financial advisor or insurance agent specializing in life insurance can be a big help. But whether or not you seek expert guidance, you can better understand what type of policy is right for you by asking yourself a few questions.

How much life insurance can I afford?

As we’ve discovered, term life insurance can be significantly cheaper than whole life insurance. If you’re on a tight budget but want the financial protection of life insurance, a term life policy may be the best choice.

Can I benefit from the cash value feature of whole life insurance?

Financial experts typically don't recommend life insurance as a primary investment tool. However, buying whole life insurance might make sense if you've maxed out your 401(k) and want to avoid some of the tax implications of an additional traditional investment account. An independent financial planner can help you understand your options.

Do I have special circumstances?

Many families' life insurance needs can be met with a term life policy. But if your family has unique circumstances, you may want to consider a whole life policy.

For example, children with special needs may require parental care long after they’ve become adults. A whole life policy, which remains in effect until the parents’ death, may make more sense than term life.

Can life insurance help protect my small business?

Life insurance can also help protect the continuity of your small business in the event of your death. By naming business partners (or responsible family members) as policy beneficiaries, you can ensure those individuals have the cash available to buy out your equity and reorganize the business in your absence.

Alternatives to term or whole life insurance

If neither term or whole life insurance addresses your financial needs, there are other options to ensure your family's finances are protected upon your passing. Or, you can employ some of these strategies in addition to purchasing term or whole insurance.

Universal life insurance

Universal life is a form of permanent life insurance in which the cash value grows at a rate tied to the stock market. Unlike whole life insurance, universal life insurance premiums may be adjusted throughout the policy's life.

Variable life insurance

Another form of permanent life insurance, variable life features a cash value that grows at a rate tied to the stock market. However, you assume the risk for any losses, so your cash value may decline if the market is lean. Premiums may vary throughout the life of the policy.

Indexed life insurance

The cash value of an indexed life insurance policy—yet another type of permanent life insurance— is tied to the S&P 500 or similar market index. Gains and losses may be subject to caps, however, which minimizes your risk. Premiums may vary throughout the life of the policy.

Annuities

An annuity is a retirement savings product offered by an insurance company. The money you deposit grows tax free and turns into income that you can access while you're still living. Depending on how your plan was drawn, the account can then go to your beneficiaries upon your passing. Withdrawals from an annuity are generally subject to tax, under complicated rules depending on the type of annuity and other factors.

Self-funding

Finally, you can self-fund a savings or investment account that can be passed to your family upon your death.

TIME Stamp: Your family’s needs will determine whether term or whole life is best

Many families favor term life insurance policies for their lower cost and simplicity. On the other hand, whole life policies meet many families' needs for life-long coverage and financial flexibility. Both policy types provide a death benefit that can help the beneficiaries meet their financial needs after a policyholder's death.

Choosing the right life insurance policy means evaluating your family’s needs and understanding the features and benefits of each policy type.

Frequently asked questions (FAQs)

Do I need both term life and whole life policies?

It’s possible to buy both term life and whole life policies. Combining coverage types may be necessary to maximize your protection. However, you may find that choosing one or the other policy type is sufficient to meet your family’s insurance needs.

Can you convert term insurance to whole life?

Some term life insurance policies can be converted to whole life. According to insurer Fabric (which notes that it does not offer convertible policies), common reasons are to continue coverage through retirement, help beneficiaries pay off their family's debts, or address the financial needs of a permanent dependent.

How many years are the longest-term life policies?

Ten to 30 years is a typical range for term life insurance. However, some companies offer even longer terms. Protective Life, for example, offers terms of up to 40 years.

Can I withdraw cash from a term or whole life policy?

It’s possible to withdraw cash from a whole life policy. One of the features of a whole life policy is its cash value component, which acts somewhat like a savings account. Once the cash value reaches a certain threshold set by the insurance company, you can typically withdraw funds or take out loans.

Term life policies do not include a cash value component and therefore do not offer cash withdrawals.

What happens to term life insurance at the end of the term?

A term life insurance policy simply expires at the end of its term. There’s no payment of the death benefit after that point.

Does whole life insurance cover long-term care?

Whole life insurance typically cannot cover long-term care unless a policy includes a coverage amendment called a long-term-care rider. According to Progressive, such a rider allows part or all of the death benefit to be used for long-term care expenses.

Another option is to withdraw funds from the policy’s cash value and use it to pay for long-term-care expenses.