Life insurance buyers are often faced with a big choice at the beginning of their decision-making process: should I buy term life insurance or whole life insurance?
The answer should be based on why you need life insurance. If you’re worried about finances that have a finite duration, like a mortgage or future college costs, you can usually figure that out with term life insurance.
But if your need for life insurance extends indefinitely, it’s time to consider the lifetime coverage provided by permanent life insurance policies. Whole life insurance is a form of permanent life insurance. Universal life insurance can also offer lifetime coverage and can be a much cheaper alternative to whole life insurance.
summary: term life insurance vs. whole life insurance
Let’s look at the positives and negatives between term life insurance and whole life insurance.
term life insurance vs. whole life insurance
what is term life insurance?
Term life insurance ensures level premiums for a specified period, such as 10, 20, or 30 years. You can usually renew term life insurance after the level term period, but your rates will no longer be locked. rates will increase each year you renew and could quickly become too expensive.
People who buy term life insurance must decide on the length of the policy and the amount of coverage.
Term life insurance policies come in several types:
- Leveled Term: A leveled term life insurance policy has the same premiums and death benefits throughout the initial term of the policy. after the level term period, rates will increase each year if you renew. Alternatively, you can get quotes for a new policy if you still need life insurance.
- Annual Renewable Term: A person with an annually renewable term life policy must renew it every year from the beginning and will see higher rates as they age.
- decreasing term: Premiums remain consistent with a declining term policy, but the death benefit decreases over the term of the policy. One type of diminishing term life policy is mortgage life insurance. the death benefit decreases as you pay off your mortgage, although the premiums remain the same.
- Return-of-Premium Term Life: A return-of-premium term life insurance policy returns your premiums if you outlive the policy. this type of policy is much more expensive than other types of term life.
- more affordable than whole life insurance.
- premiums remain the same during the level term period.
- guaranteed amount of death benefit.
- may be a good option if you need a policy specifically to cover your earning years.
- may be a good option if you primarily want to cover specific financial concerns that have a timeline, such as a mortgage.
- You can often convert term life insurance to a permanent policy.
- If you still need life insurance after the level term period, renewal rates may be unaffordable.
- no cash value you can access while you’re alive.
- fixed premiums mean no unexpected costs in the future.
- builds cash value at a regular rate.
- guaranteed death benefit.
- Life insurance riders, including life benefits, offer additional coverage and features, such as coverage for accidental death and dismemberment.
- more expensive than term life insurance.
- The death benefit will be reduced if you withdraw from the cash value or fail to repay loans you took against the cash value.
- A healthy 30-year-old non-smoker would pay approximately 5.8 times as much for a $500,000 whole life policy compared to a $500,000 40-year term life policy.
- a 30-year-old woman would pay about 6.7 times more.
- You have a specific debt, such as a mortgage, that you want to cover if you die.
- You have kids and want to make sure your college tuition is covered.
- You want life insurance to cover a certain period of time, such as the number of years you have until retirement.
- you want lifetime coverage.
- You want life insurance to finance a trust for your children.
- has a dependent who needs lifetime financial support, such as a child with special needs.
- You want life insurance that builds cash value that you can access over your lifetime.
- You want to make sure your death benefits provide money for funeral expenses no matter when you die.
term life insurance benefits
disadvantages of term life insurance
what is whole life insurance?
Whole life insurance is a form of permanent life insurance that stays in force while you make your payments.
A whole life insurance policy is cash value life insurance. there is a cash value component that accumulates over time. you can access your cash value through a withdrawal or loan, or you can surrender the policy and keep the cash value (less any surrender charges).
whole life insurance benefits
disadvantages of whole life insurance
term life insurance vs. whole life: cost comparison
Any price comparison between term and life insurance will be minimally helpful due to differences in policies.
But to get as close as possible, we compare the rates of the longest term life insurance policy currently available, Legal & generally, to a US national whole life policy:
term life insurance costs vs. whole life for a $500,000 policy
comparison of term life insurance vs. whole life insurance
comparing term and whole life insurance
Both level term life insurance and whole life insurance have level premiums. That means your premium payments won’t change and you’ll know exactly how much you’ll owe. Life insurance companies typically offer payment plan options, such as monthly, quarterly, semi-annually, and annually.
If lifetime bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payouts, such as single-premium whole life, or policies with payouts of a certain amount years, like 10 years. this allows you to have more budget flexibility later in life.
Whole life and term life policies have payments, called death benefits, that are guaranteed and don’t change. A death benefit is generally paid tax-free to your beneficiaries.
The main difference is that coverage ends with a term life policy if you don’t renew it every year after the level term period ends.
term life insurance does not build cash value. Whole life policies contain a cash value account that accumulates over time at a fixed earnings rate. This guaranteed cash value growth is one of the reasons whole life insurance is significantly more expensive than term life insurance.
The policyholder can take money from the available cash value. you can take a loan against it and pay for whatever you want. or take out money as a withdrawal that he will not return. the outstanding loan or withdrawal amount is deducted from the death benefit if you die without repaying it.
Any remaining cash value generally reverts to the insurance company upon death. Your beneficiaries receive the face value of the policy less any amount that was deducted from the cash value and not returned.
If you’re looking for lifetime coverage without the high cost of a whole life insurance policy, consider guaranteed universal life insurance.
terminate a policy
While you do your best to anticipate financial needs for many years, you may find that you no longer need life insurance. With term life insurance, you can stop paying and rescind the policy. since there is no cash value, there is no money to go.
If you want to cancel a whole life insurance policy, you can simply stop paying, but that’s not the best tactic. the life insurer will likely use any cash value to continue paying premiums on her behalf until the cash value is exhausted. instead of walking away, contact the insurer and take the surrender value, which is the cash value minus any surrender charges.
how to choose between term and whole life insurance
When choosing between term life insurance and whole life insurance, consider your reasons for purchasing a policy. If you want life insurance to replace your salary for the 15 years until your youngest child leaves for college, you don’t need the big expense of whole life insurance. term life insurance is a much cheaper option if you only need coverage for a certain number of years.
Term life insurance may be a good option if:
Whole life insurance may be a good option if:
Summary: Choosing Term vs. Whole Life Insurance
When choosing between term life insurance and whole life insurance, consider the following features and decide which is more important to you.
Can I change my mind and change my life insurance policy?
Years after purchasing life insurance, the policy you chose may no longer be the best. happens. finances and life circumstances evolve. there are potential ways to reverse course without buying a new policy.
change from term life to whole life
Term life insurance policies often include a “term life conversion” option that allows you to convert the policy to a permanent life insurance policy. there is a deadline to do this, so check your policy for the conversion period. your life insurance may have some permanent life insurance options for conversion. or it may offer only a conversion option and may not be a whole life insurance policy.
change from whole life insurance to term life insurance
If you’ve built up cash value inside a whole life policy, you can ask your insurer if you can use the cash value to switch to a term life policy that’s paid up and end the whole life policy. Your life insurance company will be able to tell you the length of the new term life policy based on the money in your cash value account.
life insurance alternatives
There are life insurance alternatives beyond whole life and term life. Universal life insurance is a type of permanent life insurance that can offer cash value, if that’s your priority. Here are the main varieties of universal life insurance.
guaranteed universal life insurance
Guaranteed Universal Life (GUL) offers the lowest risk universal life policy and is generally the cheapest type of universal life. Guaranteed Universal Life insurance provides a level death benefit and your premiums do not change. but these policies also have a minimum cash value.
Guaranteed policies also don’t allow you to adjust premiums and death benefits, which may be an option in other types of universal life insurance policies.
indexed universal life insurance
an indexed universal life insurance policy bases its cash value on gains and losses related to an index, including the s&p 500, or a fixed interest investment. offers more flexibility than gul insurance by allowing policyholders to adjust premiums and death benefits, within limits.
Indexed universal life insurance generally has high rates and fees. These fees reduce the amount of money that goes toward your cash value.
variable universal life insurance
A variable universal life insurance policy ties your cash value success to subaccounts that can contain stocks and bonds. can adjust premiums and death benefits, which is similar to indexed universal life insurance.
You’ll need to take an active role in your investment decisions when you have a variable universal life insurance policy. your decisions about your subaccounts affect your cash value gains and/or losses
variable life insurance
Variable life insurance sounds similar to variable universal life insurance, but there are key differences. Variable life insurance does not allow you to adjust your premium payments, like variable universal life insurance.
Also called final expense and funeral insurance, burial insurance is a permanent life policy with a relatively small death benefit to pay for final expenses.
These policies are typically guaranteed issue life insurance, meaning you can’t be denied and there is no life insurance medical exam.
Burial insurance policies are more expensive than other types of coverage, but may be the only option for seniors who are in poor health.
supplementary life insurance
Employers may offer life insurance to employees at little or no cost. these group policies are usually related to your employment, so you lose coverage if you leave your job.
These supplemental life insurance policies generally have smaller death benefits and generally should not be your only life insurance coverage. but they can be a good way to supplement your own individual life insurance.
frequently asked questions