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Term vs. whole life insurance

Term life insurance is cheaper, but whole life builds cash value

Profile picture of Neal Frankle
by Neal Frankle Life Insurance Contributing Editor
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Term and whole life insurance are two types of insurance products designed to provide financial support to a named beneficiary after the covered individual dies. Term life insurance is typically more affordable, but it only remains in place for a specific number of years before it expires. Whole life insurance has a cash value component that grows over time, and it remains in place as long as the policyholder continues to make payments. Beyond these basic differences, there's much more to know when it comes to term vs. whole life insurance.

What is the difference between term and whole life insurance?

Term life insurance and whole life insurance policies both allow the policyholder to choose a beneficiary to receive a death benefit, or tax-free sum of money, when they die. Term life insurance is in place for a set number of years. After that point, the policyholder may decide to renew the policy, convert it to whole life insurance or let coverage lapse. This type of policy is useful for people who want to cover a certain time period of their life, like while they have dependents or owe money on their mortgage.

Whole life insurance stays in place as long as the policyholder pays the premiums. It's also unique in that a portion of each payment adds to the cash value of the policy. Those funds can later be used to fund retirement, cover expenses during an emergency or as collateral for a loan. Whole life policies can also be part of an estate plan to pass on money to the next family generation.

TermWhole
Payout policyPays out if policyholder dies during set termPermanent, lifetime coverage; pays out when policyholder dies
CostLowerHigher
Cash value savings componentNoYes

What is term life insurance?

Term life insurance, also known as pure life insurance, provides a death benefit when the covered policyholder dies during the specific term of the plan. These policies remain in place for a set length of time. Should the covered person die during that term, the policy then pays the named beneficiary on the plan the death benefit.

Term life insurance coverage is flexible. The policyholder may be able to choose from several term lengths and payout amounts. Most terms last from 10 to 30 years.

After the policy term expires, the policy is no longer active. Sometimes it's possible to renew or extend the policy for another term. It may also be possible to convert it to a whole life policy at that time. The costs at the time you renew a policy or convert it are likely to be higher. It's also possible to simply let the policy expire.

Term life insurance premiums

Term life insurance premiums are the cost the policyholder pays to keep the policy in effect. The average cost of a 20-year term life insurance policy with a $250,000 benefit is $24.57 per month for a 30-year-old male. The cost of life insurance will vary somewhat depending on factors like your age, gender and policy details. Term life premiums tend to be more affordable compared with whole life insurance premiums because there's less overall risk of the insurance company having to pay out a death benefit.

Pros

  • More affordable than whole life policies
  • Covers needs over specific time period
  • Often convertible to whole life

Cons

  • Limited coverage term
  • Possible rising premiums
  • No cash value component

What is whole life insurance?

Whole life insurance covers the policyholder for a lifetime, in contrast with term life insurance, which expires after a set term. This type of insurance policy also has a tax-deferred savings component to it. This is called the cash value of the policy. The cash value is invested and builds over time.

The purchasing process for whole life insurance coverage is similar to the one for term life insurance. A person selects the policy he or she wants and names a beneficiary. A medical exam is usually required.

A benefit of whole life policies is that the policy may allow the policyholder to withdraw funds or borrow against the cash value. The death benefit remains in place and is paid out to the beneficiary when the policyholder dies.

Whole life insurance premiums

Whole life insurance premiums are more expensive but do not change over time. On average, whole life insurance costs $139.48 per month for a policy with a $250,000 benefit. If you lower that benefit to $100,000, the average goes down to $71.55 per month. These numbers factor in a 30-year-old male in good health; your quoted amount may differ depending on your age, gender and desired benefit amount.

Pros

  • Lasts a lifetime
  • Builds cash value over time
  • Predictable premiums

Cons

  • More expensive
  • More complex than term life insurance
  • Limitations on access to cash value

Life insurance FAQ

What are the different types of life insurance?
There are two major types of life insurance: term and whole. Within whole life insurance, there are three variations, including traditional whole life insurance, universal life insurance and variable universal life insurance. You may also hear whole life insurance called permanent life insurance.
Does whole life insurance build cash value?
Yes, the cash value is a tax-deferred savings component that builds over time as you pay your premiums. You may be able to access the cash value while still living.
Does term life insurance have cash value?
No, cash value is a component of whole life insurance.
Is whole life insurance considered an asset?
Yes, whole life insurance is generally considered an asset because you have the ability to withdraw funds from the policy during your lifetime.
When should you get life insurance?
There is no right age to consider life insurance. The time to consider life insurance depends on your individual circumstances, such as whether you have a family and what debts you have. The earlier you buy life insurance, the less expensive it is. If you have people in your life depending on you for financial stability, then you may want to consider purchasing life insurance as a safeguard in case you die unexpectedly.

Bottom line: Should you buy term or whole life insurance?

Both term and whole life insurance policies have advantages and drawbacks. For those who want affordability and life insurance to cover a specific period of time, term life offers that type of flexibility. Whole life insurance gives you lifetime coverage and a cash value component that grows over time. Both policies allow you to leave behind funds to meet your loved one's needs should something happen to you.

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Profile picture of Neal Frankle
by Neal Frankle Life Insurance Contributing Editor

Neal Frankle is a Certified Financial Planner in Los Angeles. He is the publisher of WealthPilgrim.com, an information resource for consumers. He has been a professional financial advisor since 1991 and is the editor of www.MCMHA.org.