Term vs whole life Term vs whole life insurance: Which is right for you?

Term life insurance is a type of policy that has a defined start and end date. Term life only pays if the insured person dies during the term of the insurance policy.

Term life insurance benefits

The main benefit of term life insurance is that it tends to be less expensive than whole life insurance. It may also be eligible to be converted to a whole life insurance policy if you choose to do so. On the other hand, your age and any emergency health issues can make it more difficult to qualify for a renewal once your term life insurance policy ends. These policies tend to be more straightforward, with a set number of years and no investing or savings benefits.

• Typically less expensive
• Easier to understand than whole life policies
• May be eligible to convert to a whole life policy

Other considerations

The main thing to keep in mind about term life insurance is that it’s temporary. That may or may not be right for your circumstances, based on the health and age of the insured individual. Changes in your health or age may also impact your ability to renew your term life insurance policy if it lapses. There are also no wealth-generating or tax-planning strategies to these types of policies.

• You only have coverage for a set amount of years
• These policies cannot be used for wealth-building

Whole life insuranceis a permanent life insurance policy. If you maintain it, it’ll go on until the insured person passes away. The premium is consistent, and there’s no need to requalify. Whole life insurance policies also accrue tax-deferred cash value. You can borrow against this value in a financial strategy sometimes called infinite banking. Some whole life policies may even pay regular dividends.

Whole life insurance benefits

The primary benefit of a whole life insurance policy is that it’s permanent, and it provides the policyholder with lasting security as long as they maintain their policy. Premiums don’t change, and there isn’t a need to requalify. Additionally, whole life insurance provides policyholders greater liquidity, potential tax advantages and asset protections.

• Lasts until death
• The premiums do not change
• There’s no need to requalify
• Builds tax-deferred cash value

Other considerations

While whole life insurance provides long-term protection, it’s also a lifelong commitment. If you’re interested in purchasing whole life insurance, be sure to find a policy with premiums you’re confident you can afford, no matter how life circumstances may change. Premiums for whole life insurance policies also tend to be higher than term life policies and death benefits tend to be lower.

• Typically more expensive
• Payouts to the beneficiaries tend to be lower
• A whole life insurance policy is a long-term commitment

This table will help you compare each policy type side-by-side to help you better understand what policy features you may be interested in.

Cost comparison

While the exact cost of life insurance depends on each applicant’s situation and coverage selections, whole life insurance is generally more expensive because it lasts for your entire life and accumulates a cash value. In fact, Experian claims “whole life premiums can range from five to 15 times more expensive than term life premiums.”

Policy duration

If you pay the premium, a whole life policy stays with you for your entire life. However, term life policies provide coverage for a specific period. In other words, you could have coverage for a 10-year, 20-year or 30-year term depending on where you purchase term life coverage and the option you choose.

Cash value

With term life insurance, there’s no cash value accumulation, just a death benefit. However, with whole life policies, part of the premium is used to build up a cash value. Depending on the terms and conditions of the policy, it’s sometimes possible to withdraw or borrow from the cash value amount.

Please note, it’s a good idea to review policy guidelines with the insurer or a financial expert before borrowing or withdrawing funds. These scenarios could have implications for taxes or the death benefit of the policy.

Death benefits

Both term life and whole life policies have a death benefit. In other words, if the insured individual dies while coverage is in force, their designated beneficiary would receive the death benefit as outlined in the policy’s terms and conditions.

Premiums

Generally speaking, whole life insurance premiums remain steady as long as the policy is active, according to the Insurance Information Institute (III). In other words, you don’t need to worry about increasing premiums as you get older.

The type of term life insurance many people are familiar with — fixed term — also has a fixed premium throughout the policy’s term. However, there are some variations of term life insurance — like increasing term or decreasing term — where the premium (and death benefit) could increase or decrease over the life of the policy.

With term life insurance, it’s also worth noting that when the policy expires, premiums at renewal are likely to be more expensive. For example, if you purchased a 20-year policy when you were 35, a new policy is likely to cost more when you’re 55.

Ultimately, the right life insurance policy for you and your family depends on your unique situation.

For example, if you and your partner buy a house, you might want financial security while you’re paying off the mortgage. In this case, a term life policy could be a great option. However, if you want lifelong coverage that provides greater flexibility — and can afford higher premiums — whole life insurance might be right for you.

If you need assistance, talk to your insurer. They should be able to provide answers to questions and help you assess your options before you select a policy.

You might be able to switch your term life insurance policy to a whole life insurance policy depending on the type of coverage you purchase.

Convertible term life insurance policies allow the insured to get cheaper term life coverage initially with an option to switch to a more expensive permanent policy later. Typically, the death benefit remains the same, and there’s no additional medical screening when you convert, according to Investopedia. After a conversion to whole life insurance, the policy would provide lifelong coverage and have a cash value component.

Even though insurers can’t raise costs based on changes to your health status when you convert, Investopedia notes that insurers do use your age at the time you convert to determine pricing. So, if you think you might want whole life insurance, it’s likely cheaper to purchase the coverage as soon as possible at a younger age. However, if you want whole life insurance but can’t afford it just yet, a convertible term life policy could provide a flexible option to meet your needs.

Investopedia notes that the actual conversion process depends on policy details. So, if you’re interested in convertible term life coverage, be sure to talk to your insurer about your options.