Whole Life vs. Term Life Insurance: Here's What Matters to You

Knowing the distinction between whole life and term life insurance can mean all the difference in the world for a head of household.

Brian O'Connell 

Feb 12, 2019 12:38 PM EST

Life insurance is an important, yet often overlooked household financial need. It not only protects your family, but it also protects your income today and down the line.

Make no mistake, not having a good life insurance policy puts a household on the fast path to financial ruin when a breadwinner dies. Data from BestLifeRates.orgshow that one in three U.S. households say a financial disaster would be more likely, if not certain, within 30 days of a breadwinner's death.

While the need for life insurance is apparent, the process for making the right policy choice is not. In general, when looking for a good individual life insurance policy, it boils down to two main options - whole life insurance and term life insurance.

While both life insurance policy models are useful in protecting you and your family, there are commonalities and differences that you'll need to factor in to make the decision before signing on the dotted line.

Let's take a deeper dive into whole life insurance versus term life insurance and examine how each might help or hinder your household's life insurance experience.

What Is Whole Life Insurance?

If you're looking for a permanent form of life insurance, then whole life insurance, as the name implies, is for you.

The most widely-purchased form of individual life insurance, whole insurance offers a two-pronged approach to life insurance consumers:

• A savings component (known as "cash value" in insurance company lingo. With a savings component, a whole life insurance policy can offer the policy-holder an emergency fund if the money is needed in the midst of a household financial crisis. A life insurance company creates the cash value component by steering a slice of each payment into a separate savings account - called a cash value account.

• A life-long protection component, which as long as your payments are made, generates a cash death benefit when the recipient dies.

A whole life insurance policy is a good choice for a consumer who appreciates the stability of a known and fixed death benefit payout, along with an insurance policy of its own - the ability to dip into the cash value portion of the policy for emergencies, on an as-needed basis.

Price-wise, a whole life policy varies, as it's dependent on myriad factors, including the amount of coverage needed, the age of the policyholder, relative health and life expectancy (which is broadly calculated by the insurance company), and personal habits (for example, smoker versus non-smoker.)

For example's sake, a healthy, non-smoking 35-year-old male may pay around $250 per month for a $250,000 whole life policy.

Whole life policy recipients may pay their premium on an annual, or in most cases, can choose to pay twice-annually, quarterly or pay on a monthly basis. The policyholder can easily arrange for the premium payment to be taken straight out of his or her bank account on the payment due date.

It's possible that an insurance company may charge a fee for paying monthly and not charge a fee for paying annually - it's best to check with the life insurance provider and ask about any payment timetable fees.

Benefits of Whole Life Insurance Policies

Whole life policies offer consumers the following advantages:

• The policy premiums and the death benefit payout are both fixed, adding stability to the mix
• With a cash reserve element, the policy-holder can take out funds, or even a loan, on an as-needed basis
• Whole life insurance policies offer the consumer a guaranteed rate of return
• Solid protection for heads-of-household, retirees and family members who wish to guarantee a substantial cash payout to their loved ones

What Is Term Life Insurance?

Term life insurance is a good deal for an individual, especially the head of household, who only wishes to buy long-term (but not for his or her entire life) quality life insurance. In many cases, consumers purchase term life insurance for periods between 10 and 30 years.

Term life insurance offers more customization and flexibility to policyholders, offering insurance coverage for a specific period of time. For example, a pre-retiree may want to buy term life insurance up to the day he or she retires, or until their children reach adulthood and can fend for themselves financially.

Term life insurance policies are cheaper, too. It is not uncommon to see a major insurance carrier offer a $250,000-year policy over 20 years for as little as $25 a month. Term policies are also significantly less expensive than whole life policies.

For example, a $100,000 term life insurance policy for a 35-year-old head of household may cost about $200 annually. Compare that to $200 spent on a whole life insurance policy for the exact same individual - it would only provide about $14,000 worth of payout coverage.

In addition, term life insurance policies enable policyholders to transition from their policy into a whole life insurance policy, offering permanent financial protection for the policyholders loved ones when he or she dies.

Premium payments are similar to whole life products. You can pay annually, twice-annually, quarterly or on a monthly basis. Again, fees may apply if you pay quarterly and it's advisable to ask ahead if fees apply to any form of term life insurance payments.

Benefits of Term Life Insurance

• Term life insurance is usually the least expensive form of individual life insurance - just know that the policy payout period is temporary and is specifically created to replace the recipient's income earned during his or her working years, in the event of death
• Term life policies are simple, with no forced savings component (the main reason why whole life policies are more expensive than term policies.) With a term life insurance policy, the recipient is buying direct death benefit coverage, at a low price
• The temporary need factor is very much in play with a term policy. Let's say a young family, without much cash at hand, wants to protect the family in the event of a bread winner's death at a young age. With term coverage, young families can gain that coverage for a period of years, and then cancel it and reroute the insurance premium payments into their retirement fund

Whole Life vs. Term Life Insurance

The insurance industry knows what it's doing by offering two disparate, but effective life insurance policies to consumers based on their unique individual needs. The choices between whole life and term insurance policies truly offer something for everyone.

If you're looking to purchase a basic and direct life insurance policy, and only for a specific period time, then a term life insurance policy is likely your best bet.

If you're in the market for an insurance policy for life, and that provides you with a cash value policy accumulation over the life of the policy, then a whole life insurance policy is your best choice.

No matter what choice you make, be sure to talk to a trusted, knowledgeable life insurance expert before you make any big decisions. There's obviously a lot on the line when addressing your life insurance needs, so take some time to get some advance professional help when you're in the market for life insurance.

One day, your family will be gratified you made the right choice.