Term vs whole life insurance

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• What is the difference between term and whole life insurance?
• Term vs. whole life insurance
• Which is better: term or whole life insurance?
• Frequently asked questions

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APA: Brooks, A. (2024, August 13). Term vs whole life insurance. Bankrate. Retrieved September 13, 2024, from https://www.bankrate.com/insurance/life-insurance/term-life-vs-whole-life/

MLA: Brooks, Ashlyn. "Term vs whole life insurance." Bankrate. 13 August 2024, https://www.bankrate.com/insurance/life-insurance/term-life-vs-whole-life/.

Chicago: Brooks, Ashlyn. "Term vs whole life insurance." Bankrate. August 13, 2024. https://www.bankrate.com/insurance/life-insurance/term-life-vs-whole-life/.

Written by

• • Insurance
• • Financial Markets

Ashlyn Brooks is a finance writer with more than half a decade of experience, known for her knowledge in areas such as taxes, insurance, investing, retirement, finance news, and banking products.

Edited by

• • Life Insurance

• • Life insurance
• • Auto insurance

Natasha Cornelius, CLU, is an insurance editor for Bankrate, specializing in auto, home and life insurance.

Reviewed by

• • Life insurance
• • Insurance coverage

Tony Steuer, CLU, LA, CPFFE is an internationally recognized financial preparedness advocate, podcaster, and award-winning author. Tony developed the Get Ready Movement to empower and educate people on all areas of personal finance.

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Key takeaways

• Term life insurance offers coverage for a specific period and lower premiums than whole life insurance, but it doesn’t build cash value.
• Whole life insurance is designed to provide lifelong coverage with a cash value component that grows over time. It offers higher premiums but potential financial benefits.
• Term life insurance is generally more affordable and suitable for finite needs, while whole life insurance may be better for long-term planning and financial stability.
• Choosing between term and whole life insurance depends on your financial goals, budget and coverage needs.

If you’re looking for a new life insurance policy, there’s a good chance you’ve considered options for both whole and term life insurance policies. But what exactly is the difference between whole life and term life insurance? While both provide financial death benefits when the policyholder passes away, there are a couple of important factors that separate these policy types. Below, we’ve compared the differences between term life and whole life and included some pointers to help you figure out what type of life insurance is right for you and your family.

What is the difference between term and whole life insurance?

When comparing the differences between term and whole life insurance, consider the length of policy, the cash value and the cost.

• Length of policy:Term life insurance provides coverage for a specified period, such as 10, 20 or 30 years. In contrast, whole life insurance, a type of permanent insurance, offers lifelong coverage, typically until the policyholder reaches age 95 to 121, provided premiums are paid as required.
• Cash value benefit: Term life insurance premiums are applied entirely towards the death benefit, with no cash value component. Whole life insurance, however, includes a cash value feature. This means a portion of your premiums builds up a cash value that you can access during your lifetime through policy loans.
• Cost: Generally, whole life insurance is significantly more expensive than term life insurance. In fact, it can be 10 to 15 times more costly for the same face amount of coverage. This higher cost reflects the lifetime coverage and cash value benefit that whole life policies offer.

Let’s take a closer look at the features, advantages and disadvantages of each policy type and explore the differences between term and whole life insurance in more detail.

Whole life insurance

Whole life insurance is designed to provide coverage for your entire lifetime as long as you keep up with the premiums. Unlike term life insurance, which is for a limited time period, whole life insurance is a type of permanent insurance that combines a consistent premium with a guaranteed death benefit.

Here’s a closer look at what you should know about whole life insurance:

• Cash value: Part of your premium payments contributes to a cash value component. This amount grows over time and can be accessed through policy loans. However, keep in mind that loans accrue interest, and any outstanding loan balances will reduce the death benefit your beneficiaries receive.
• Value to beneficiary: When you pass away, your beneficiaries receive the full death benefit amount minus any outstanding loans against the cash value. The cash value itself is not included in the death benefit since it is a reserve on the policy. It’s an additional feature available during the lifetime of your policy.
• Payment schedules: Whole life insurance offers different payment options. You can typically choose to pay your premiums monthly, quarterly, semi-annually or annually. Additionally, there are limited-pay and single-pay options available:
  • Limited-pay: You pay premiums for a set number of years (e.g., 10, 15 or 20 years) instead of for your entire life. This can help your cash value accumulate faster.
  • Single-pay: You make one large payment upfront, which covers the cost of the policy for your lifetime. This option also accelerates the growth of the cash value.

  Term life insurance

  Term life insurance offers coverage for a specific period, typically between 10 to 30 years. Some insurers, such as Protective and Banner, even offer terms up to 35 or 40 years. Once the term ends, the coverage expires unless you have options to renew or convert the policy. Here’s what you need to know about term life insurance:

  • Terms:Term life insurance policies are available for various lengths, from short-term options like 10 years to longer terms such as 30 years. Some carriers offer even longer terms. The most common term is 20 years, which provides substantial coverage for a significant period.
  • Renewability: Many term policies come with a renewability feature, allowing you to extend your coverage for additional terms. If your policy doesn’t renew automatically, you will need to activate this option several months before the current term ends.
  • Convertibility: Some term life policies offer a convertibility feature, which allows you to switch to a permanent life insurance policy without undergoing a new medical exam. This option can be beneficial if you wish to maintain coverage beyond the term without additional health evaluations.
  • Return of premium: A return-of-premium policy feature refunds a portion of the premiums you paid if you outlive the term. While this can provide added value, it generally results in higher premiums compared to standard term policies.
  • Premiums: Term life insurance companies base your premium on a few factors, including your age, lifestyle and health at the time of application. Your premium stays the same for the entire term. However, premiums can increase when you renew the policy because the cost is based on your age at the time of renewal.
  • Level vs. decreasing term: With a level term policy, you pay a consistent premium and maintain the same death benefit throughout the term. This is the most common type of term life insurance. A decreasing term policy, on the other hand, features a death benefit that decreases over time, often used to align with reducing financial obligations like a mortgage.

  Riders

  In life insurance, riders are optional benefits that you can add to your policy to tailor it to your specific needs and circumstances. These add-ons enhance your coverage by providing additional features or benefits beyond the standard policy terms. Riders can be especially useful for addressing particular concerns or situations that your base policy doesn’t cover.

  Some riders come at no extra cost, while others may require an additional premium. It’s important to weigh the cost of these riders against the benefits they provide to ensure they fit within your budget and meet your needs.

  Here are some common types of life insurance riders:

  • Accelerated death benefit rider: This rider lets you access part of your death benefit if you’re diagnosed with a terminal illness. It’s often included at no additional cost, helping you manage expenses during a difficult time. Keep in mind that using this benefit will reduce the amount available to your beneficiaries.
  • Long-term care rider: This rider helps cover costs if you need long-term care services, such as nursing home or home care. It’s useful for managing expenses related to extended care and can be included with some policies. Using this benefit will reduce the amount available to your beneficiaries. Note that it’s typically available only with permanent life insurance, not term policies.
  • Accidental death rider: This rider provides an additional payout if your death results from an accident. It can help provide extra financial support in such tragic circumstances, though not all types of accidents may be covered. Note: Without this rider, a life insurance policy will still pay out if death is the result of an accident. With this rider, the payout is increased.
  • Waiver of premium rider: If you become disabled and cannot work, this rider allows you to stop paying premiums without losing coverage. It typically covers you until you can return to work or reach retirement age.
  • Guaranteed insurability rider: This rider allows you to buy additional coverage without undergoing a medical exam, even if your health declines. It provides flexibility to adjust your coverage as your needs change over time.
  • Return of premium rider: With this rider, if you outlive your term policy, you may receive a portion of the premiums paid back. While this rider can be more expensive, it offers a financial return if you don’t make a claim during the policy term.
  • Family income benefit rider: This rider provides ongoing income to your family after your death, supplementing the lump sum of the death benefit. It’s beneficial for ensuring that your loved ones have financial support over time.
  • Child term rider: This rider provides coverage for your children and pays a benefit if they pass away before a specified age. It can also convert into a permanent policy for them later in life.
  • Term conversion rider: This rider allows you to convert your term policy into a permanent policy without a medical exam. It offers flexibility to switch to a permanent policy as your needs evolve.
  • Chronic illness rider: This rider provides access to a portion of your death benefit if you are diagnosed with a chronic illness. It can help cover medical and long-term care costs; using this benefit will reduce the amount available to your beneficiaries.
  • Disability rider: This rider pays a monthly income if you become disabled. The coverage amount and duration vary by policy and can help support you financially if you can’t work.

  Keep in mind that the availability of these riders can vary depending on the insurer and the type of coverage you have.

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