Claire Smith Last Updated On: September 15, 2023

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The Difference Between Term and Whole Life Insurance & How to Choose

Term vs Whole Life Insurance

Look at you: you’re already thinking about life insurance. That means you’re a step ahead of most folks, and we salute you! But before you get too overwhelmed with your options and forget about life insurance, we want to help.

We’re going to cover two of the most popular types of life insurance, term and whole life insurance and the differences between them, so that you can get a better sense of your options and maybe even choose a policy that’s right for you. 

Let’s dive into it.

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What Is Term Life Insurance?

Term life insurance is one of the most popular forms of life insurance. This is because it’s affordable and protects you and your loved ones when you need it most. But how does it work exactly? Let us tell you.

Term life insurance is insurance that lasts for a set term. The term length is your choice, and it’s typically anywhere from 5-30 years in length, but 20 years is the most common. By paying monthly or annual premiums, you keep your term life insurance policy up to date and in good standing.

How Term Life Insurance Works

If you pass away during the term of your policy, your beneficiary (the person you have designated to receive your life insurance payout) receives the agreed upon amount in your policy, also called the death benefit. This is usually tax free and can be used by the beneficiary any way they please. 

If you outlive the term, your beneficiary doesn’t receive anything (but hey, you’re still kicking, right?). At this point, the policy essentially terminates, or you can sometimes extend/renew the term or even convert to a whole life policy before your term ends, depending on your insurance provider.

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How Much Is Term Life Insurance?

Great question. Term life insurance premiums are usually more affordable than whole life insurance, but more costly than a policy like funeral insurance. Your premiums are customized to you and factor in your age, health, where you live, your job (such as police officers or firefighters), any high risk hobbies you have (like scuba diving or hang gliding), and more. 

It also factors in your term length and death benefit; a policy for $250,000 over 10 years is going to be pricier than the same amount over 30 years, because premiums are spread out over fewer years. 

But on average, a 20-year term policy of $250,000 is $159 per year for a 30-year-old man and $142 per year for a 30-year-old woman. Add 20 years to those ages, and you’re looking at $477 per year for men and $378 per year for women for the same policy type. 

Limitations of Term Life Insurance

Term life insurance isn’t the right choice for everyone, so it’s important to understand the limitations of the policy type. 

For starters, term life insurance isn’t a guaranteed issue policy, meaning you might not be able to take out a policy if you have pre-existing health conditions. You’ll need to undergo either a medical exam or health questionnaire to qualify, and keep in mind that not being truthful could void your policy. That’s right: if your insurance provider finds out you weren’t completely truthful on your application, they can deny or reduce the death benefit payout to your loved ones after you pass away. 

Next, there’s the fact that while term life insurance is more affordable compared to whole life insurance, the cost isn’t insignificant. You could end up paying a tidy amount for years and walk away with nothing if you outlive your term. 

Finally, there’s age limits to consider. Most insurance providers won’t let you take out term life insurance after age 80, including renewing existing policies. If you’ve decided on life insurance later in life, you might be out of luck depending on your age. 

What Is Whole Life Insurance?

Now that you’re more familiar with term life insurance, it’s time to explore another type of life insurance policy: whole life insurance. This is a form of permanent life insurance, meaning it lasts your entire life, no matter how long you live. 

That means that purchasing a policy guarantees your loved ones a payout, whether you pass away within three years or 40 years. This makes whole life insurance more expensive than other forms of life insurance, because the payout is guaranteed. 

Whole life insurance also comes with a cash savings account, which we’ll dive into more next.

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How Does Whole Life Insurance Work?

Whole life insurance is a little more complex than term life insurance, especially because of the cash value component. But just like term life insurance, you pay a set premium monthly or annually for as long as you live. When you pass away, your loved ones are guaranteed the death benefit that’s outlined in your policy. 

The cash value component is essentially a way to build savings. Part of your premiums gets invested for you and the account starts to grow. You can borrow against the amount during your lifetime for major life purchases, like a downpayment for a home or college tuition. 

The cash value amount usually does not get passed to your beneficiaries, and any outstanding amount that you’ve borrowed from it is deducted from the death benefit. Some insurers do allow the death benefit to increase based on the cash value account, but usually any leftover amount goes to the insurance provider when you pass.

How Much Is Whole Life Insurance?

Because whole life insurance means a guaranteed payout, there’s a premium cost to thise sort of assurance. The cost of whole life insurance is based on the same varying factors as term life insurance, like your age, health, amount of death benefit, and more, but we can still give you an average to help you understand your options.

For a 30-year-old male and $500,000 in coverage, the annual cost averages $4,323. This means that the monthly costs can be more than the annual costs of term life insurance, which is a sharp increase. 

But for many, being able to guarantee that they can leave their loved ones a lump sum is worth the higher costs. But for others, there are other ways to leave their loved ones money after their death without these high premiums.

If you’re still not sure which policy type is right for you, get access to free quotes here to help you understand the costs of both. 

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The Limitations of Whole Life Insurance

We went over the drawbacks for term life insurance, and now it’s time to do the same for whole life insurance. Fair’s fair, right?

To start, the obvious downside of whole life insurance is the higher cost. It can be prohibitively expensive for some, since many 30-year-olds don’t have an extra $5,000 kicking around each year to spend on insurance. 

Next, we have the cash value component. Although it can be a benefit for some to have a forced savings vehicle, it can be redundant for others. After all, you don’t control how the money is invested (you would need variable life insurance for that) and although you get a guaranteed return rate, you can miss out on exceptionally good stock market year gains. You might have more luck with an outside investment account that you control. 

And while you can access the cash value during your lifetime, you need to make the account whole again before you pass or the difference is deducted from the death benefit to your loved ones. Some providers allow you to purchase a rider that passes both the death benefit and cash value to your loved ones, but again, another bump in costs.

Term vs Whole Life Insurance: What’s the Difference?

By now, you should have a pretty good grasp of the main differences between these two policy types. The biggest difference? One has a guaranteed payout, while the other doesn’t. With whole life insurance, your loved ones are guaranteed a death benefit, but with term life insurance, your loved ones only receive a payout if you pass away during the term (a little morbid, but there you have it).

Here are a few key differences you’ll want to consider:

  • Term life insurance lasts for a set number of years. Whole life insurance has no end date. 
  • Term life insurance is less expensive compared to whole life insurance.
  • Whole life insurance has a cash value component on top of the death benefit, while term life insurance only has the death benefit. 
  • With the cash value component of whole life insurance, you can borrow against it during your lifetime and often earn dividends. With term life insurance, you have no access to extra cash or interest.
  • With term life insurance, you can sometimes extend or renew the term. Whole life insurance lasts your entire life, with no changes allowed. 

The two policy types are very different and serve different end goals. But they do have some similarities too. For example, with both policies your premiums are level and fixed throughout the entire length of the policy. You also have to undergo a medical exam or health questionnaire, and can be denied coverage based on your age or health.

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Which Policy Type Is Right for Me?

Life insurance is personal. There’s no one-size-fits-all policy, and that’s a good thing. It means you can customize your life insurance to what matters most to you, whether that’s cost, term, payout for your loved ones, and more.

And while we can’t decide which policy is best for you, we can help you find the answer. So if you’re deciding between terms vs whole life insurance, consider these questions:

  • Do you want to guarantee that your loved ones receive a payout when you’re gone? Or do you care more about protecting them during a certain time frame, such as when they’re young or while you have a mortgage?
  • Can you afford the higher premiums for whole life insurance?
  • Do you think you would benefit from the cash value component of whole life insurance? 

Term life insurance is a great option for those with young kids or a mortgage that want protection during these vulnerable years. It’s also great for those who want to lock in affordable life insurance now, even if they don’t know what they’ll want or need in 10-20 years. 

Whole life insurance is all about the guaranteed payout; the peace of mind that comes with knowing your loved ones are taken care no matter when you pass is valuable. It’s also a good option for those who find it hard to save money on their own, thanks to the cash value account. 

Only you can decide which policy type is best for you and your situation. But with either option, you get great coverage that protects you and your loved ones, and that’s a win in our books. 

While you’re making these big life decisions, it doesn’t hurt to think about retirement too. Building a solid retirement plan is easier than you might think, and life insurance can be an important piece of that puzzle. Grab our free retirement planning guide to get the juices flowing and the planning started—it’s never too early. 

Key Takeaways: Term vs Whole Life Insurance

Insurance can be overwhelming, but it doesn’t have to be. You now know that term life insurance lasts a set term and that the payout isn’t guaranteed. On the flip side, whole life insurance lasts your whole life with a guaranteed death benefit and the added benefit of a cash value account that you can access during your lifetime. 

Both policy types are great options for providing for your loved ones and getting peace of mind now. Choosing the right policy for you comes down to your budget, your goals, and your situation. 

Now that you’re a life insurance whiz, it’s time to set up your policy. Go ahead and get access to free quotes here and you’ll be set in no time.

We’ve got you covered.

Claire Smith Claire is a creative entrepreneur with a variety of marketing and content creation skills, including blog and web copy writing, research, and strategy. She has a Masters in Cultural Studies from Queen's University and is known for thinking laterally about marketing, based on her deep knowledge of people and behavior.

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