Term vs. Whole Life Insurance

Which type of life insurance is best for you? Find out what the differences are and how much each might cost before you decide.

Written by Erin Gobler / April 29, 2022

Quick Bites

  • Term life and whole life insurance are two of the most popular types of life insurance policies available, but they work in very different ways.
  • Term life insurance provides a death benefit to your beneficiaries if you die within a specified period of time.
  • A whole life insurance policy combines the benefits of term life insurance with an investment component that offers tax-deferred growth.
  • In general, term life insurance is cheaper and best suited for most people, but the high premiums of a whole life policy may be worth it for some.

Life insurance may not seem as immediately necessary as, say, health insurance, but it can give you and your loved ones peace of mind. Life insurance is a contract between you and an insurer where the insurer promises to pay out a certain amount of money to your designated beneficiary when you die.

It’s a critical component of creating your financial plan and ensures that if something happens to you, your loved ones won’t face any major financial burdens.

Unfortunately, shopping for life insurance can be overwhelming, partially due to the many types of policies available. In this article, we’ll break down two of the most common types of life insurance policies—term life and whole life—so you can choose the best policy for you.

Inside this article

  1. Term vs. whole life insurance
  2. How term life insurance works
  3. How whole life insurance works
  4. Which is best for you?
  5. Switching between term and whole

Term vs. whole life insurance

Term and whole life insurance are two of the most popular types of life insurance. While term life insurance is for a set amount of time and provides only a death benefit, whole life insurance can last your entire lifetime and combines a death benefit with a cash value component.

The table below summarizes some of the most important differences between term and whole life insurance, and we’ll explain each type of policy further in the next sections.

Term life insuranceWhole life insurance
Permanent coverageNoYes
Duration10 to 30 yearsLifetime
Premium over timeLevelLevel
Guaranteed death benefitYesYes
Guaranteed cash valueNoYes
Medical examSometimesYes

How term life insurance works

Term life insurance is the simplest type of policy you can buy, and, as a result, it's also the most affordable. Term life insurance lasts for a set period of time, often between 10 and 30 years. The policy has a specified death benefit. If you die during the policy term, the insurance company will pay your death benefit to the beneficiary—or beneficiaries—you’ve named.

The cost of term life insurance depends on your age, gender, health, lifestyle and more. In general, the younger and healthier you are, the lower your premiums will be. As a result, it’s beneficial to lock in your policy at a younger age so you can pay those low and level premiums for as long as you have the policy.

Tip: The average premium for a 20-year term policy with a $250,000 death benefit ranges from just $14.26 a month for a 25-year-old female to $85.40 a month for a 55-year-old male.[1]

Pros and cons of term life insurance

Low monthly premiumsProtection for a limited time period
Guaranteed death benefitNo cash value investment component
Simple policy terms
Level premiums

How whole life insurance works

Whole life insurance—also known as permanent life insurance—combines the death benefit of term life insurance policies with an investment component.

Think of a whole life insurance policy as two entirely separate products. When you pay your monthly premium, a portion of the funds covers your death benefit, which is the amount your beneficiaries will receive when you die.

The other portion of your insurance premium builds up a cash value. The funds are invested and grow over time. These returns are tax-deferred, meaning you don’t owe income taxes on your gains as long as the cash remains in your policy.

Throughout your lifetime, you can borrow against this cash value. You can also use it to fund your premiums later in your life, or surrender it for cash.

“As long as you pay the premium, the insurance company will pay a death benefit to your loved ones when you pass away,” says Brian So, founder of Brian So Insurance. “Some whole life policies also pay out a dividend, which you can use to increase the death benefit and cash value in your policy.”

An important distinction between term and whole life insurance policies is that while term life insurance policies only stay in effect for a specific time period ranging from 10 to 30 years, whole life insurance policies last your entire lifetime, as long as you continue paying your premium.

As you can imagine, because whole life insurance combines a death benefit with an investment component, the premiums are considerably higher than they are for a term life insurance policy.

Tip: The average monthly cost for a policy with a $250,000 benefit ranges from $175 for a 25-year-old female to $692 for a 55-year-old male.[1]

Pros and cons of whole life insurance

Lifetime coverageHigh monthly premiums
Guaranteed death benefitLower death benefits
Tax-deferred investment growthLow investment returns
Level premiums

Term vs. whole life insurance: Which is best for you?

Term and whole life insurance can both provide important financial benefits that can protect your family (and even you) in the future. However, they are generally best suited for different types of people.

“Term insurance is most suitable for people with short-term needs, like paying off the mortgage and other debts,” says So. “You can buy a large amount of term coverage for a low cost.”

Term life insurance is appropriate for most people. In the event of your death, your family will receive a death benefit, which can be used to pay for your funeral and cover financial obligations like the mortgage or college costs. And because of the low monthly premiums, you’ll have additional funds available to invest for the future.

Still, there are some people who may benefit from the cash value component of whole life insurance.

“Whole life is used for needs that will last your lifetime such as funeral costs,” says So. “You can also use it as a tax-sheltered investment and for estate planning needs like paying off taxes upon your death. Whole life insurance is much more expensive than term, so people usually buy a smaller amount.”

The typical returns for the investment component of a whole life insurance policy are considerably lower than what you could earn in the stock market over time. However, a whole life policy can benefit high-income earners who have already maxed out their other tax-advantaged investment accounts. Because the earnings in a whole life insurance policy are tax-deferred, the policy can help to reduce your current tax burden and set money aside for your beneficiaries.

Switching between term and whole life insurance

Many people sign up for a life insurance policy, but then discover the type of policy they’ve chosen isn’t compatible with their needs. The good news is that you’re not stuck with the first policy you bought.

If you currently have term life insurance and want to switch to whole life, ask your insurer if there’s a conversion option in your policy that allows you to convert your current policy. If not, you can simply cancel your policy and buy a whole life policy.

If you have a whole life insurance policy and want to switch to term, it’s possible to get the insurance that works best for you, but you typically can’t convert your permanent policy directly to term. Instead, you need to purchase a separate term life insurance policy and then cancel your whole life policy.

Be sure to contact your insurer and request to withdraw the cash value component of your account. Keep in mind that you may incur a “surrender charge” depending on your policy.[2]

Article Sources
  1. “Average life insurance rates 2022: how costs change by age, term, and policy size,” Policygenius, https://www.policygenius.com/life-insurance/life-insurance-cost.
  2. “Life Insurance FAQ,” Northwestern Mutual, https://www.northwesternmutual.com/faq/life-insurance-faq.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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