Term vs. whole life insurance: Which is right for you?

Both term and whole life insurance offer predictable benefits if you pass away, but they’re significantly different financial products. (iStock)

If you have a family to provide for, you might consider life insurance as a way to protect them when you pass away. Life insurance pays a certain amount of money to your spouse, kids or other beneficiaries when you die.

Term and whole life insurance are two common types of life insurance with many similarities, but also some key differences in how you pay and how long the policies last. When you’re shopping for life insurance, it’s important to know the difference before making your decision. Learn more about both types so you can choose the right kind of life insurance for your needs.

Credible lets you compare life insurance rates through its partner, Policygenius.

Term vs. whole life insurance: What’s the difference?

A term life insurance policy lasts for a certain number of years and pays out a benefit to your family if you die within that time period. Whole life insurance also pays out a death benefit and lasts for your entire life, but costs significantly more. 

What’s term life insurance?

Term life insurance is also known as "pure insurance" because it functions strictly like an insurance policy. The term is for a set period of time — 10, 20 or 30 years, for example, or until a policyholder hits a specific age. As long as you pay your monthly premiums, your beneficiaries receive the death benefit if you pass away within that term. You generally have the option to renew your policy when you reach the end of the term. 

Term insurance is cheaper than whole life policies, though costs vary depending on your age and your health when you take out the policy. For a 40-year-old in good health, the premium may cost between $60 and $70 per month for a $1 million benefit.

What’s whole life insurance?

Whole life insurance is significantly more complicated. This type of policy covers you with a specific death benefit until you die, no matter your age. 

Your premiums go into a type of savings account that’s invested by the insurance company. As you pay over time, the cash value component of your account grows. You may be able to borrow against this value, though you may lose your benefit if you fail to repay the loan. Unlike term life insurance, once you build cash value, you can receive that value of the policy back if you cancel your whole life insurance policy. 

Whole life insurance is much more expensive than term life insurance. That same 40-year-old in the example above would pay $1,000 to $1,300 per month for a whole life insurance policy with a $1 million benefit. 

You can use Policygenius, a Credible partner, to shop around and compare life insurance rates.

Term vs. whole life insurance: Pros and cons

As you weigh the two types of life insurance, consider their pluses and minuses.

Term life insurance

Pros

• Lower cost — Term life insurance is significantly cheaper than whole life insurance for the same death benefit. You may be able to buy an amount of coverage that you couldn’t afford with a whole life policy.
• Renewable — You may be able to renew your policy at the end of the term to maintain coverage. If you still want insurance after a 20-year term, for example, you may be able to renew for another 20 years.
• Predictable benefit — Your benefit stays the same through the entire term, so you know exactly how much your beneficiaries would receive if you pass away. If you buy a policy with a benefit of $1 million, you know that’s what your family will receive as long as you continue paying your policy premiums.

Cons 

• Costs may increase — Your premiums may increase significantly when you renew at an older age. The 20-year policy you take out at age 30 will likely be cheaper than a 20-year policy renewed at age 50.
• No cash value — If you cancel your policy or fail to pay your premiums, you don’t receive any money back. When the policy ends, there are no accumulated savings.
• Coverage ends — If you die after your term life insurance expires, your family receives no benefit.

Whole life insurance 

Pros

• Lifelong coverage — Your coverage lasts for your entire life, as long as you pay your premiums. If you die at age 100, your family will still receive a benefit if you’re up to date on your policy.
• Cash value — Your whole life insurance policy has a value that grows over time that you can borrow against. You may also receive the policy’s cash value back if you end your policy. Plus, you may receive dividends on your investment that you can use to help pay your premiums or for any other expenses.
• Predictable benefit — Your benefit will stay the same for the life of your policy. A policy with a $1 million benefit will pay that amount whether you die at age 40 or age 90.

Cons

• Higher cost — Whole life insurance is many times more expensive for the same benefit. These higher premiums mean you might not be able to purchase as much coverage. You may be able to afford a $1 million benefit with term life insurance, but only $250,000 with a whole life policy, for example.
• More risk involved — Whole life insurance is a more complex product, and you may lose your coverage if you don’t abide by the rules regarding loans against the cash value or other provisions. You may also be tempted by the ability to borrow against your policy and run into financial trouble.
• Low growth rate — If you’re using whole life insurance as an investment, you may be disappointed in the returns and slow growth of your policy’s cash value.

Term vs. whole life insurance: How to choose

Weigh these factors when choosing between a term life insurance and whole life insurance policy:

• Costs and premiums — Look at the monthly premiums and any other costs you’ll need to pay for either type of insurance and see if they fit in your budget.
• Payouts — The death benefit is a crucial aspect of life insurance. Make sure you’re buying enough coverage to take care of your family in the event you pass away.
• Cash value — If you’re weighing whole life insurance, pay attention to how the cash value is calculated and how much you might be able to access.

When to consider term life insurance

• You’re a young, healthy person wanting to protect your family during your prime working years for a low cost.
• Your financial goal is to pay off your mortgage or pay for your child’s college education.
• You have a limited budget but still want coverage.
• You prefer to invest your money with more flexibility and higher returns.

When to consider whole life insurance

• You want one policy that will cover your entire life.
• You want to make an investment that will grow over time.
• You have dependents you want to take care of for your entire life, such as a child with disabilities.
• You have a large amount to spend on life insurance coverage.

When you’re ready to apply for life insurance, use Credible partner Policygenius to compare life insurance rates in minutes.

Other types of life insurance to consider

A term life policy and whole life insurance aren’t your only choices. Here are some other types of permanent life insurance you may consider:

• Universal life insurance — This type of insurance is more flexible and allows you to adjust your premium payments once you reach a certain level of cash value in your account. Your investment grows at a rate similar to a money market account. This is also known as adjustable life insurance and may be helpful if your financial situation changes.
• Indexed universal life insurance — These policies grow at a rate tied to a certain market index, like the Dow Jones Industrial Average or S&P 500. The rate you receive will likely be lower than the actual movement of the index.
• Variable life insurance — Variable life insurance allows you to choose how your premiums are invested, but the death benefit and cash value of your policy may change based on how your investments perform.

As you compare the many different types of life insurance available, you may consider working with a financial adviser or insurance agent at a life insurance company to help you weigh which type of policy works best for your financial needs. Also, keep in mind that you’re not locked in to one type of life insurance. You may be able to convert one type of policy into a new policy as you age.