Do You Need Whole Life Insurance or Term Life Insurance?

If you're considering purchasing life insurance, you may have heard the terms "whole life" and "term life" thrown around. But what do these terms actually mean, and which is right for you?

While both policies offer death benefit protection, they significantly differ in their features, costs and benefits.

The Difference Between Term Life Insurance and Whole Life Insurance

After you pass away, both whole and term life insurance policies provide a death benefit — a tax-free lump sum to your beneficiaries. The difference between the two comes down to timing and cash value components.

Term life insurance provides a death benefit if the policyholder passes away while the policy is in effect — typically 10 to 30 years. You may be able to renew your policy or convert to a whole life plan at the end of your term. Since you’re risking the policy expiring without a payout, term life tends to be the cheaper option.

As the name implies, whole life insurance covers a policyholder’s entire life — as long as they keep making premium payments. These policies also have a cash value component you can borrow against or withdraw from in certain instances. Without a term limit, whole life is typically more expensive than term life insurance.

What Should I Know About Term Life Insurance?

Term life insurance is essentially basic life insurance. You’ll sign up for a set period. If you pass away during the term, your beneficiaries receive a guaranteed death benefit. Once the period is up, your coverage ends.

There are a few key takeaways to consider:

Terms

According to the Insurance Information Institute, terms can last for decades, but the most common is a 20-year policy. You may have the option to renew at the end of your term, typically annually. You may also be able to convert to a whole life policy.

Age limits

Your policy will likely have an age limit. The Insurance Information Institute says most providers cut off term life policies before the policyholder’s 80th birthday. As you age, you may not be able to renew your insurance for the same term length.

Decreasing term policies

Your policy may be level or decreasing. A level policy holds the same death benefit throughout your term. A decreasing policy gradually decreases the death benefit on a monthly or annual basis. Some people opt for a decreasing term policy as they get closer to retirement and build up savings.

Premiums

Your premium depends on your age, gender, lifestyle factors and health when you apply or renew. Remember that term life insurance is typically cheaper for younger buyers and increases as you age.

Guaranteed benefits

If your policy is active and you keep paying monthly premiums, your beneficiaries will receive a guaranteed death benefit. This sum is tax-free and can be used to pay for nearly anything.

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What Should I Know About Whole Life Insurance?

Whole life insurance offers a fixed premium rate and a guaranteed death benefit. Your policy won’t expire as long as keep paying premiums. There’s also a cash value component to consider. However, whole life insurance typically costs more.

Here’s the key takeaways to consider:

Premiums

Your premium depends on your age, gender, lifestyle factors and health when you apply or renew. Remember that term life insurance is typically cheaper for younger buyers and increases as you age.

Cash value

A portion of your premiums are placed in a savings account (also known as the “cash value.”) As your cash value grows, you can withdraw funds or borrow against the investment.

Guaranteed benefits

Your beneficiaries will receive a tax-free guaranteed death benefit. However, your cash value is typically not included. Your insurer may also deduct any unpaid loans taken from the cash value from the death benefit.

Dividends

Depending on your chosen insurance company, your policy might be eligible for dividends. You can reinvest these dividends to grow your cash value faster. Dividend policies may have a higher premium. Compare rates against several insurance companies to ensure you get the best deal possible.

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Should I Choose Whole Life Insurance or Term Life Insurance?

Ultimately, the decision depends on your specific financial situation and goals.

You may want to consider term life insurance if:

• You’re looking for affordability: Term life typically offers cheaper premiums.
• You need coverage for a specific time: Term life insurance can protect your family through key milestones like paying off a mortgage or raising young children.
• You want flexibility: A term policy with the option to convert to a whole life policy may help you save money now and pivot in the future as your income grows.

On the other hand, a whole life insurance policy may be a better fit if:

• You want living benefits: With the option to borrow against your cash value, a whole life policy can give you extra financial peace of mind.
• You value simplicity: While you may pay more, you won’t have to deal with terms, renewals or conversions with a whole life policy.

Comparing insurance companies is also key when deciding between whole life insurance and term life insurance. Different companies offer different policy levels, limitations and benefits. We can help you take the guesswork out of your search. With our Life Insurance Comparison Tool, you can quickly receive quotes from the nation’s top insurance companies.