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Term life vs. whole life insurance

Choosing between term and whole life insurance is confusing — how do you figure out the difference between the two and which one suits your needs? Let’s break down term life vs. whole life so you can make the best decision for you.

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Overview

At their core, term and whole life insurance policies serve the same purpose — to provide financial protection to your beneficiaries if you pass away. But they differ in quite a few ways.

Term life insurance provides coverage for a specific time frame or term. It can last for 10, 20, 30 or even 40 years, after which coverage ends. There’s no investment or savings component, so you don’t accumulate cash value. Generally, premiums for term life are lower compared to whole life. Medical exams are typically mandatory, but some insurers offer no-medical-exam policies— known as simplified issue or guaranteed issue policies.

As the name suggests, whole life is a type of permanent life insurance that provides coverage for your entire life. A portion of your premium goes towards building cash value, which can grow tax-deferred at a fixed interest rate over time. Premiums are higher than term life due to the lifelong coverage and cash value component. Typically, the insurer requires a medical exam (guaranteed issue policies are a common exception).

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Term vs. whole life pros and cons

Understanding the pros and cons of term and whole life insurance can help you pick the right coverage for your needs.

 

Term life insurance

Pros explained

• Generally less expensive than whole life: Term life is typically cheaper than permanent life insurance because it expires after a set time and doesn’t build cash value.

• Simple to understand: Without the investment component, term life lacks the complexities often found with whole life insurance.

• Flexible term lengths: You can choose terms that fit your needs, like 10, 20 or 30 years. You can even purchase multiple policies with varying terms, so they drop off as financial liabilities decrease.

• No commitment after term ends: Once the term is up, you’re free to reassess without any binding commitment. In some cases, you can convert your term life policy into a whole life one without having to take a medical exam.

Cons explained

• No cash value: Premiums go solely toward coverage, meaning no portion is saved or invested for future use.

• Premiums may rise if renewed: Renewing for another term is often more expensive because your age has increased and your health conditions may have changed. Many term life policies have a guaranteed renewability clause. The clause doesn’t require you to undergo a new medical exam if you renew the policy, but the insurer will likely increase your premium to account for potential increased health risks. Your policy may also be yearly renewable after the initial term, meaning it will renew on a year-to-year basis and your premiums will only be fixed one year at a time.

• No benefits if outlive term: Once your chosen term is over, so is your coverage. There’s no payout or financial benefit unless you purchase an optional return of premium (ROP) rider. With this coverage, the insurance company will refund some or all of your premiums if you outlive your policy term.

Whole life insurance

Pros explained

• Lifelong coverage: Once your application is approved, you pay your first premium and your policy is issued, you’re covered for life — as long as you continue to make your payments.

• Builds cash value: A part of your premiums is put into a savings component, which grows over time at a guaranteed rate.

• Fixed premiums for life: Your payment amount stays the same throughout your entire policy. It won’t increase as you age or if you develop health issues.

• Can borrow against cash value: You have the option to take loans or make withdrawals using your policy’s accumulated cash value. This can help with retirement expenses, long-term care and more.

• May receive dividends: Some whole life policies may pay dividends to policyholders, which can typically be taken as cash or used to make premium payments, purchase additional coverage or add funds to your cash value account.

Cons explained

• Generally more expensive than term life: Whole life insurance typically costs more than term life because it builds cash value you can borrow from while you’re still alive and provides lifelong coverage.

• More complex: Because of the investment and policy loan features, whole life policies can be more difficult to understand compared to term life insurance.

• Policy loans may reduce death benefit or have tax implications: While borrowing funds from your cash value can be easier than obtaining a private loan, doing so can still have financial consequences. For example, if you don’t pay off the loan before you pass away, the death benefit paid out to your beneficiaries will be reduced. Also, failing to pay back your loan and allowing your policy to lapse may result in a tax bill.

• Less flexible and potentially lower returns than other permanent life insurance: Compared to other types of permanent life insurance, like universal life and variable life, whole life insurance can be less flexible as your premiums and death benefit cannot be adjusted. Additionally, the cash value’s growth rate might not be as high — but it may be more stable.

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Final expense insurance

As its name implies, final expense insurance is designed to cover funeral and burial costs and other end-of-life expenses. It usually has lower coverage amounts and is easier to qualify for — medical exams are generally not required. Final expense policies are typically offered as a type of whole life insurance to those who are 45 to 85 years old. However, the potential to earn cash value depends on the insurance company.

• Who it’s for: Seniors or those wanting to ensure their funeral expenses won’t burden their family

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Guaranteed or simplified issue insurance

With guaranteed issue or simplified issue insurance, no medical exam is required. You may be asked to complete a health questionnaire if you’re getting a simplified issue policy. These policies have a quick approval time, but they may have higher premiums than standard term and whole life due to greater risk.

• Who it’s for: Those who might not qualify for other policies due to health-related issues