Term Life vs. Whole Life Insurance

There are two main types of insurance – term and whole life.  Term life insurance is easier to understand and costs much less than whole life insurance, but it has a fixed end date.

Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.

Term vs. whole life: policy features

Duration1 – 30 yearsLife
Premium Low premiums6-10x more than term
Guaranteed Death Benefit?YesYes
Cash ValueNoYes, accrues
How Cash Value GrowsN/AEarns interest or can be invested
PremiumsCan increase periodically or stay level for the policy durationLevel
NotesGenerally used to cover expenses until kids complete college.Commonly used in estate planning.

Which Policy Should You Choose?

Term life is sufficient for most families who need life insurance, but whole life and other forms of permanent coverage can be useful in certain situations.

Choose term if:

  • Only need life insurance to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage.
  • Want the most affordable coverage.
  • Think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.

Choose whole life if:

  • Want to provide money for your heirs to pay estate taxes.
  • Have heirs who might be forced to sell off parts of your estate to pay the tax bill without an insurance payout.
  • Have a lifelong dependent, such as a child with special needs. Life insurance can fund a special needs trust to provide care for your child after you’re gone.
  • Want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs.
  • Want to equalize inheritances. If you plan to leave a business or property to one child, whole life insurance could compensate your other children.

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