Term vs. Whole Life Insurance

By Donna Freedman

Life insurance benefits your loved ones when the inevitable happens. While it can be tough to think about your own demise, choosing the right term or whole life insurance policy can protect your household and allow you to leave a legacy to those you care about the most.

To learn more, visit our guide to the Best Life Insurance Companies of 2022.

What Is the Difference Between Term Life Insurance and Whole Life Insurance?

Term life insurance provides a guaranteed death benefit only if the insured person dies during the term, or the period of time the policy is in effect. Typically, that’s anywhere from one to 30 years or until a specific age. Term life insurance tends to be much cheaper than whole life coverage because term policies do not have a cash value component and may expire without paying any benefits.

Whole life insurance is a form of permanent life insurance that covers the person for their entire life, rather than for a fixed period of time. Whole life pays a guaranteed death benefit and has a cash value component that the policyholder can borrow against or withdraw under certain conditions.

What Is Whole Life Insurance?

As the name implies, whole life insurance lasts your whole life. As long as you keep making premium payments, this type of life-long coverage will pay a guaranteed death benefit when you die. Some key features of whole life insurance are:

• Premiums are guaranteed. When you buy this kind of life insurance, the premium is locked in. It will not increase during the life of the policyholder. In general, the higher the death benefit, the greater your premium will be.
• Cash savings grow over time. You may be able to borrow against the equity or withdraw some of the money. If you die before the loan is repaid in full, the death benefit will be reduced by the amount still owed, however. You may also be able to surrender the policy and receive the cash value.
• A medical exam is often mandatory. Depending on the policy type, you may be required to submit to a physical examination before your application is approved in order to determine your premiums and insurance risk. Some companies do offer no-exam whole life insurance policies that have a guaranteed payout and may accumulate cash value, but these policies tend to have coverage levels that are much lower, usually $25,000 or less. 

What Is Term Life Insurance?

Term life insurance lasts for a specific term, or period of time, and pays the beneficiary a guaranteed death benefit only if the policyholder dies during the term. However, some term life policies offer a return of premium feature, which gives back some or all of the premiums if the policyholder does not die before the term expires. Return of premium term life policies are generally more expensive.

Other features of term life include:

• Premiums may change. The most common type of policy, known as level term, has fixed premium rates, but there are other policy types where premiums increase or decrease over time with corresponding changes to the death benefit amount.
• Some policies can be converted to whole life.  Some insurers allow conversion at any time during the policy term, while others impose time or age limits. You may also be able to convert the policy at the end of the term. If you want the option to convert your coverage, look for a policy that contains a provision for conversion or offers the option of adding a term conversion rider.
• Terms are flexible. Most insurers offer policy terms ranging from one year to 30 years or longer, although some companies also offer terms that last until a certain age, such as 65. In general, the shorter the term and the younger you are, the lower your premium will be.
• A medical exam may not be required. While many insurers still require an exam for a basic term life insurance policy, several insurers now offer no-exam term life insurance.

Is Whole Life Insurance or Term Life Insurance More Expensive?

In general, a term life policy is much cheaper than a whole life policy. For example, a hypothetical 40-year-old woman who is a non-smoker could pay as little as $52 a month for a 20-year, $1 million term life insurance policy. If that same woman wanted a whole life insurance policy, she’d pay $1,000 or more per month, according to our data.

Term coverage is cheaper because it pays out only if the insured person dies during the term of the policy. Whole life insurance costs more because it pays a survivor benefit regardless of when the individual passes and also accrues cash value over time.

What Other Kinds Of Life Insurance Are Available?

Life insurance takes multiple forms. Depending on your needs and financial goals, one of these types of permanent life insurance may be worth considering:

• Universal. A universal life insurance policy has a bit more flexibility than whole life. For example, you may be able to increase the death benefit or change your premium payments. Typically, the policy earns money based on either the market index or the insurer’s investment portfolio. However, the value could potentially go down should the rate decrease. 
• Indexed. This insurance coverage has a cash value as well as a death benefit. The cash value account earns interest based on a stock market index your insurer chooses. There’s no fixed rate, but insurers typically pay out a minimum rate. You can generally borrow or withdraw from this policy and adjust the premium payment and payout.
• Variable. In addition to a death benefit, variable life insurance has a savings account that can be invested in stocks, bonds, or money market mutual funds. This of course carries risk: If your investments don’t do well, both your cash value and death benefit could fall. Some policies guarantee that your payout won’t drop beyond a stated minimum.
• Final expense. Also known as burial insurance, this is a type of whole life policy with a fairly low payout – typically $5,000 to $25,000 – that is purchased specifically to pay for end-of-life expenses such as a funeral and burial or cremation. The payout is small, but so are the premiums: They can be as little as a few dollars per week.

As you shop for insurance, you'll likely see various types of policies, including variations of those listed above, including variable universal life and indexed whole life. For more information, visit our guide to Life Insurance Quotes.