Term vs. Whole Life Insurance: Pros and Cons

Life insurance provides a death benefit after the insured passes away, which could be critical to supporting surviving loved ones. Making decisions about insurance coverage is never easy, especially when you’re choosing between term life and whole life insurance policies. Term policies work differently from whole life policies, and each has pros and cons. When choosing between these two options, it is important to study them carefully to make the right choice.

This guide provides insight into how both types of policy work and which is best for different situations.

What is term life insurance?

Term life insurance is a type of life insurance coverage that provides protection for a specific period, known as the term. This type of policy is usually the most affordable life insurance option and provides coverage for a specific length of time, such as 10, 15, or 20 years.

Term life insurance provides coverage only for a specific period of time. This is the key difference between term vs. whole life insurance, which is another kind of life insurance.

Term life policies offer coverage in exchange for premium payments, but once the policy's term ends, the coverage lapses, meaning the policyholder will have to apply for a new policy if they want to continue coverage.

The pros of term life insurance include affordability, flexibility, and simplicity. However, one significant disadvantage of term life insurance is that the policyholder may outlive the policy term, meaning their beneficiaries will not get a payout. This is the key difference between term vs. whole life insurance, which is another kind of life insurance.

What is whole life insurance?

Whole life insurance, also known as permanent life insurance, provides coverage until the policyholder's death, as long as the premiums are paid, and the policy remains in force.

The pros of whole life insurance include guarantees of coverage as long as the premiums are paid, the savings component that builds cash value over time, and the death benefits that never expire. However, whole life insurance is expensive, and the savings component's returns may not match those of other investment options.

One key difference between term vs. whole life insurance is the amount of time the policy is in effect. Whole life insurance doesn't have a set coverage term. As long as the policyholder keeps the policy active, it remains in effect. Someone could pass away five years or 50 years after buying whole life insurance, and the death benefit would still pay out.

The other key difference between term life vs. whole life is that whole life policies are much more expensive. These policies generally have higher premiums because they combine an insurance component with a savings component. In a whole life policy, the cash value of the policy increases over time, and policyholders may withdraw or borrow money from the policy tax-free.

When deciding between term vs. whole life insurance, policyholders should think about whether they want to invest in life insurance.

What term and whole life insurance have in common

Term insurance and whole life insurance are two different types of life insurance policies. However, they both serve the same purpose, which is to provide financial protection to the policyholder's loved ones in the event of their passing.

It's a good idea to consider similarities when deciding between term vs. whole life insurance. Many of the best life insurance companies offer both types of policies. Consumers can choose which one makes the most sense for their specific situation after evaluating term life vs. whole life similarities and differences.

Here are some things term and whole life policies have in common:

• Both provide a death benefit. But when they pay this benefit varies. Term life policies only pay the death benefit if the policyholder dies during the coverage term. Whole life policies always pay it out.
• Both typically require a medical exam. However, that's not always the case in every situation, so it's best for consumers to ask.
• Both typically price premiums based on risk. Older policyholders or those with health issues pay more.
• Both policies require premiums to be paid. The policyholder will need to continue paying the premiums to keep the policy in force.
• Death benefits are typically tax free for beneficiaries. This is true for both policy types.

These similarities between term life vs. whole life are important, and they show that, ideally, both kinds of insurance should be purchased when young and healthy. Both provide protection for loved ones after death.

Term life vs. whole life: Cost comparison

Whole life policies are much more expensive than term life policies. In fact, rates for whole life policies are typically between five and 15 times more expensive than term life policies. This is one of the biggest differences between term vs. whole life insurance.

Term life policies are cheaper because:

• They aren't in effect for as long
• There's no guaranteed payout of the death benefit
• There's no savings component
• The policies don't acquire a cash value

Whole life policies cost more because some of the premiums are invested. And the insurer must pay out the death benefit regardless of how old the policyholder is when they pass, as long as the insurance is still in effect.

RELATED: What Is 10-year Term Life Insurance?

Term vs. whole life: Cash value

Term life policies are the more affordable life insurance option, but they do not acquire a cash value. The only way the policy pays out money is if the policyholder dies while covered.

Whole life policies, on the other hand, serve as a savings vehicle. This is a big disparity between term vs. whole life insurance. A whole life policy always accrues a cash value. The policy could be surrendered and the insurer would pay the cash value, minus fees.

Sometimes, money can be withdrawn from whole life policies. And policyholders can typically borrow against the cash value. The insurer provides the loan. If there is a remaining balance on it, it's deducted from the death benefit.

However, it's important to keep in mind that the cash value is often accompanied by higher premiums and may not offer the same flexibility as other savings options. It ultimately comes down to individual preference and needs, but understanding the impact of cash value can help you make an informed decision.

Term life vs. whole life: Pros and cons

When considering whole life or term life insurance, it's best to look at the pros and cons of each. The table below demonstrates the advantages and disadvantages of term vs. whole life insurance.

Should I get term or whole life insurance?

The biggest reason to know the difference between term and whole life insurance is to decide which is the best option. But which is better, term or whole life insurance? To determine which type of life insurance is right for you, consider your financial needs and goals.

If you are young, have many expenses, and need coverage for a specific period, term life insurance may be ideal for you. This type of insurance is usually affordable, and you can select the term that works for you.

Term life insurance is cheaper than whole life insurance. Some of the best term life insurance companies offer extremely affordable premiums. This type of insurance doesn't provide permanent coverage, but most people don't need permanent coverage. For policyholders who won't always have people dependent on them, a term life policy is usually a better option. Many people, for example, eventually have retirement savings, a paid off home, and grown children. No insurance may be needed then.

On the other hand, whole life insurance may be ideal for you if you want permanent coverage regardless of your age and health status, and you want the savings component's potential benefits.

People who need insurance forever are better off with a whole life policy. This could include parents of children with disabilities who will need expensive lifelong care. Those who prefer to use insurance as a savings vehicle will also want to choose a whole life policy. Just remember, other investments may provide better returns with lower fees.

Converting term and whole life insurance

When deciding between term vs. whole life insurance, the decision is not necessarily permanent. In certain scenarios, it may be possible to convert from one policy type to another.

Can I change my whole life policy to a term?

Converting a whole life insurance policy to a term life policy is typically not allowed; however, some whole life policies offer an "extended-term" alternative. This feature allows policyholders to utilize the accumulated cash value to purchase term insurance for a specific duration while maintaining the death benefit.

This option is irreversible in most cases, meaning policyholders cannot switch back to a whole life policy once exercised. Nevertheless, for those facing financial constraints, this alternative offers an affordable way to sustain the death benefit temporarily without continuing premium payments for a whole life plan.

Policyholders can also cancel their whole life policy and use the remaining cash value to purchase a term policy. This can be a smart choice if your financial needs have shifted and you require more flexibility in your premium payments. Using the cash value of an existing policy to purchase a term policy can help ensure that your family is still protected while also allowing you to adapt your coverage over time without completely starting from scratch.

However, keep in mind that your policy is no longer a guaranteed death benefit and you will have to reapply and go through a medical exam. Your premiums will be determined by your health, age, and other risk factors at the time you apply.

Can I change my term policy to whole life?

Term life policies usually include clauses allowing conversion to whole life policies. However, this will result in a significant premium increase in most cases. Whole life policies are between five and 15 times more expensive than term life plans. The policyholder will need to pay more after the conversion.

This switch is possible only during the "conversion period," and this should be specified in the insurance policy documents. Typically, the conversion period begins between one to five years after coverage takes effect. It ends after the insured becomes too old, which is defined by the insurer. Generally speaking, conversion may no longer be possible once the policyholder reaches age 65 or 70.