Term vs Whole Life Insurance: How They Compare
How each type works, what cash value means, how premiums compare and the questions to ask before you buy.
In this guide
Key takeaways
- Term life covers you for a set period and usually has lower premiums.
- Whole life covers you for life and builds cash value, but costs more.
- Many term policies can be renewed or converted to permanent coverage.
- Start with how much coverage you need and for how long, then choose the type.
Introduction
Life insurance pays money to the people you choose, your beneficiaries, when you die. It can help them pay the mortgage, replace your income or cover costs such as childcare and college. The two most common types are term life and whole life.
This guide explains how they differ, what each costs and how people decide between them.
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How term life insurance works
Term life insurance covers you for a set period, such as 10, 20 or 30 years. If you die during that period, your beneficiaries receive the death benefit. If the term ends and you're still alive, the coverage ends and nothing is paid.
- Lower premiums: the National Association of Insurance Commissioners (NAIC) says term generally offers the most protection for your premium dollar.
- No cash value: most term policies don't build savings you can use later.
- Renewal: many term policies can be renewed at the end of the term, even if your health has changed, but the premiums will be higher.
- Conversion: some let you convert to a permanent policy during a set period without a new medical exam, at a higher premium.
How whole life insurance works
Whole life is a type of permanent life insurance. It covers you for your whole life, as long as premiums are paid. Premiums usually stay the same for life.
- Higher premiums: premiums can be several times higher than term for the same death benefit at first.
- Cash value: part of each premium builds a cash value that grows over time, usually tax-deferred.
- Borrowing: you can usually borrow against the cash value. Any loan you don't repay, plus interest, is taken from the death benefit.
- Surrender: if you cancel the policy, you may receive the cash surrender value, which can be low in the early years.
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Not now, show me another guide →Term vs whole life at a glance
| Term life | Whole life | |
|---|---|---|
| How long it lasts | A set number of years | Your whole life |
| Premiums | Lower at first | Higher, usually level |
| Cash value | Usually none | Builds over time |
| Can borrow against it | No | Yes |
| Flexibility | Simple, may renew or convert | Fixed structure |
Other types of permanent insurance
- Universal life: permanent coverage with more flexible premiums and death benefits. The policy stays in force as long as the cash value covers its costs.
- Variable life: the cash value is invested in options such as stock and bond funds. The NAIC notes these have the most potential to build cash value, but also the most risk of losing it.
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How much coverage do you need?
Before choosing a type, work out roughly how much money your family would need, and for how long. Many people add up:
- debts that would need paying, such as a mortgage or car loan
- years of income your family would need to replace
- future costs, such as childcare or college
- final expenses
Then subtract savings and any coverage you already have through work. Coverage through an employer often ends if you leave the job, so it's worth checking.
When each type is often considered
Term life is often chosen when:
- the main need lasts a set time, such as raising children or paying off a mortgage
- you want the most coverage for the lowest premium
Whole life is often considered when:
- you need coverage that lasts your whole life, for example for a dependent with lifelong needs or estate planning
- you want a policy that builds cash value and can afford the higher premiums for the long term
Some people combine the two: a smaller permanent policy for lifelong needs, plus term coverage for the years when their family depends on their income most.
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Questions to ask before you buy
- How long will the premium stay the same, and what happens after that?
- Can the term policy be renewed or converted, and until what age?
- For whole life, what will the cash value be after 5, 10 and 20 years? Ask for an illustration.
- What are the fees and surrender charges?
- How long do I have to review the policy and cancel for a refund after it's delivered?
- Is the insurer licensed in my state, and what is its financial strength rating?
Your state insurance department can confirm whether an agent and insurer are licensed.
An example of how premiums can compare
The NAIC gives an example of how the premiums can differ for a $100,000 death benefit bought at age 35: about $1,800 a year for whole life, compared with about $250 a year for annually renewable term. Actual prices depend on your age, health, the insurer and the policy, but the gap shows why term is often chosen when budgets are tight.
Keep in mind that renewable term premiums rise as you get older, while whole life premiums usually stay level.
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Conclusion
Term life gives you a lot of coverage for a lower premium, for the years you need it most. Whole life costs more but lasts for life and builds cash value. Start with how much coverage your family would need and for how long, compare quotes for the same amount, and make sure you can comfortably keep paying the premiums.
Common questions
What happens when a term policy ends?
Coverage stops and no benefit is paid. Many policies let you renew at a higher premium or convert to permanent coverage before the term ends.
Can I have more than one life insurance policy?
Yes. Some people combine policies, such as a term policy and a smaller permanent policy, to match different needs.
Is life insurance through work enough?
It may not be. Workplace coverage is often a multiple of salary and usually ends if you leave the job.
Sources and further reading
This guide is general information, not insurance advice. Coverage, exclusions and prices vary by insurer, policy and state. Always read your policy and talk to a licensed agent or your insurer about your situation.
