What’s the Difference Between Term and Whole Life Insurance?

Shopping for life insurance can feel like a daunting task, with all the providers and all the coverage options to think through, but it’s actually more straightforward than you think once you have some of the basic terminologies down.

If you’ve done some reading up on life insurance, then you’ll know that there are several types you can buy which are designed for various needs and preferences. Term life insurance and whole life insurance are the two most popular types, but what are the differences, exactly, and how do you know which one is right for you?

In this article, we’re going to highlight everything you need to know about term life insurance and whole life insurance so you can quickly decide which fits your needs and start comparing life insurance rates.

Term Life Insurance

Term life insurance is a simple and affordable life insurance option, which is what makes it the most popular choice for those looking to buy life insurance. You select how long you want your coverage to last, you pay your monthly premiums, and in return, the insurer guarantees they’ll pay a “death benefit” to your beneficiary as long as it’s within the specified term.

The death benefit is the payout amount which can range anywhere from $250,000 up to $1 million and more. Most providers offering term life insurance offer coverage between 5 and 30 years. The longer the term and the greater the payout amount you choose, the higher the premium will be.

Since term life insurance only lasts the length of the term you choose, it’s far less expensive than whole life insurance, which is a policy that covers you for life.

Whole Life Insurance

Whole life insurance is exactly how it sounds. It’s a policy that gives you life-long coverage and never expires. Unlike term life insurance, it also comes with a cash value account.

Investment component

One way to understand this cash value is like this: When buying into life insurance, everyone’s payments, or “premiums” contribute to a pool of money. When someone dies, the insurance company takes some of this money from the pool and pays that person’s beneficiary. The rest of the money is used by insurers to earn a small return by making conservative investments.

With term life insurance, you don’t ever see this invested pool of money. When you buy whole life insurance, however, the insurance company makes this pool of money visible to you. So you pay your premiums, you get your life-long coverage, and the insurer invests the money for you, building a cash value.

You can even borrow against this accumulated cash value in your policy, but you’ll have to pay yourself back with interest. If you need quick cash, a personal loan would be a better option than borrowing against your life insurance policy.

While this sounds like a great financial idea on the surface, there are drawbacks. For one, if you adjust your investment returns for inflation, you’ll likely find that it’s smaller than what you could be getting from other types of investments, like a Roth IRA or 401(k), for example.

The bottom line is it could take many years before your policy even accumulates a cash value that is equal to what you’ve put into it, and many insurers will charge fees for investing the money for you.

Term Vs Whole Life Insurance

Here’s a side-by-side comparison of both types of life insurance so you can easily see the differences.

Term Life Insurance Whole Life Insurance
A temporary policy that will expire A permanent policy that covers you for life
Low-cost monthly premiums Expensive monthly premiums
Premiums are fixed but will increase if renewed Premiums are fixed as long as they’re paid
The death benefit to the beneficiary is tax-free The death benefit to the beneficiary is tax-free
No cash value or investment component Cash value component that grows over time at a guaranteed rate, tax-deferred
You can use the cash value to pay your premiums
You can borrow against the cash value
Eligible for company dividends
Flexible payment arrangements

Which is Right For Me?

Now that we’ve covered the major differences between term life insurance and whole life insurance, you can probably start to see which policy is better suited for you.

Term life insurance is good for:

  • Those who are only looking for temporary coverage, such as someone who only wants to be covered until their child is out of college or someone who only wants coverage while they’re paying off their mortgage.
  • Those looking for affordable, low-cost monthly premiums
  • Those who may want to switch to a permanent policy later. Most insurers allow this option.

Whole life insurance is good for those who:

  • Want the security of being covered for life
  • Want final expenses covered, like funeral and burial costs
  • Have a life-long dependent, such as a special needs child or a disabled spouse
  • Want life-long coverage and have already maxed out their other retirement accounts

If you’re still not entirely sure, buying term life insurance is a safe bet. It’s affordable, it’ll keep you covered for a number of years, and you can always renew your policy when it expires.

Ladder Life offers term policies that you can cancel at any time. You can also decrease your coverage—and price—as often as you’d like, making it a flexible option.

For those who want to compare term and whole life insurance policies, Sproutt Life is an online platform that partners with reputable insurers to get you quick, personalized life insurance rates for what you need.

Final Thoughts

Buying life insurance doesn’t have to be a complicated process. Now that you’re more familiar with the two most popular types of life insurance policies and how they work, it’s time to start looking at different life insurance companies to get the best rates.

Sarah Pritzker Sarah Pritzker Last update:
Sarah Pritzker loves researching - and then sharing - all the info she can get her hand on in the world of finance. Whether it's comparing credit cards, contrasting life insurance policies, staking out investment opportunities, or investigating fraud, Sarah's got her finger on the pulse of the finance moment.