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Term vs. Whole Life Insurance: Pros and Cons

Updated June 7, 2022
Christy Bieber
By: Christy Bieber

Our Insurance Expert

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Life insurance provides a death benefit after the insured passes away, which could be critical to supporting surviving loved ones. When purchasing a life insurance policy, it's necessary to choose between term vs. whole life insurance. 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 insures the policyholder's life. The policyholder chooses a death benefit, such as $250,000 or $1 million. The policyholder also chooses beneficiaries. Those are the people who receive the death benefit.

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.

A term life policy might be in effect for 15 years, 20 years, 30 years, or some other designated time period. If the policyholder dies during the term, the death benefit is paid. If they don't, then it isn't. Policyholders need to understand this key discrepancy between term vs. whole life insurance, as whole life insurance remains in effect indefinitely.

What is whole life insurance?

Whole life insurance is another type of life insurance coverage. It's also sometimes called permanent insurance. Consumers need to know the difference between term vs. permanent life insurance to decide which is right for them.

One key difference between term vs. whole life insurance is the 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. Insurers set premiums higher than what it would cost just to cover the policyholder based on their risk level, especially during the early days of the policy. The extra money is invested by the insurer. As a result, whole life policies acquire a cash value. 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

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 policy. So 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.
  • 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 investment 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: Learn more about 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 an investment 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.

Term life vs. whole life: pros and cons

When considering whole life or term life, 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.

Type of Insurance Pros Cons
Whole Life Provides coverage indefinitely. Serves as an investment vehicle. Accrues a cash value. Investment returns may not be as generous as other investments. Premiums are higher than term policies.
Term Life Cheaper than whole life insurance. Provides coverage for a limited time when needed. Leaves money free to invest in other assets that can provide a higher return with lower fees. Coverage can end without a death benefit being paid out if the policyholder doesn't die during the term. The policy isn't an investment and doesn't accrue a cash value.

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? It depends on each consumer's situation.

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.

Whole life insurance does provide permanent coverage. 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 an investment will also need 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 choice isn't always irrevocable. In some cases, it's possible to change one type of policy to the other type.

Can I change my whole life policy to a term?

Converting from whole life insurance to term life insurance isn't always possible. In some cases, however, whole life policies have an "extended-term" option. This allows the policyholder to use the cash value accrued in a whole life insurance policy to buy term insurance for a specified term. The death benefit will stay the same and the cash value of the whole life plan will pay the premiums.

Generally, the decision to trigger the extended-term option isn't revocable. This means once the policyholder exercises this option, they can't go back to a whole life policy. Still, for those who can't afford to continue paying premiums for a whole life plan, this option provides an affordable way to keep the death benefit in effect temporarily.

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.

FAQs

  • When deciding between term vs. whole life insurance, consumers need to consider their individual situation. Term life is better for most people, though.

    Most people eventually no longer have dependents relying on them. They won't need coverage forever. Term life is much cheaper. And while it doesn't acquire a cash value, consumers can often get a better return on investment by investing in other assets rather than a whole life policy.

  • Whole life insurance policies sometimes come with high fees. Cashing in an investment may not be possible for a long time due to high surrender fees. And the return on investment may be lower than investors could get elsewhere, such as by investing on their own in an S&P 500 fund.

  • Most supplemental life insurance policies are add-ons to term life policies. It's an additional coverage that a policyholder adds on to an employer-provided life insurance plan.

    For example, a policyholder whose employer offers life insurance could purchase supplemental life insurance to increase the amount of coverage they have. Or they could add accidental death and dismemberment insurance to their existing policy. In some cases, supplemental life insurance can also be used to add life insurance coverage for a spouse or children.

    It's important to understand the differences between term vs. whole life insurance when deciding if supplemental life insurance provides enough coverage.

  • Converting term to whole life insurance makes sense if a need for permanent insurance coverage develops. This could occur, for example, if a family member becomes disabled and money will always be needed for their care. The conversion will result in higher premiums.

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