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Term vs. whole life insurance: How to make the right choice

Term life insurance is more straightforward and affordable than whole life insurance, but it will expire. Here’s how to decide which one is best for you.

 

There are plenty of life insurance options out there, including new variations on traditional coverage, but most people end up deciding between traditional term and whole life policies, each of which has its selling points. Term life insurance is affordable and straightforward but doesn’t last for life, while whole life insurance doesn’t expire, but is more expensive. 

Term life insurance is right for most people, since they won’t need coverage in their retirement years, but that doesn’t mean it’s right for everyone. Whole life insurance is best for people with lifelong dependents or more complex financial planning needs.

Key takeaways

  • Term life insurance is the right choice for most shoppers.

  • Whole life insurance is five to 15 times more expensive than term life.

  • Whole life has a cash value component that acts similarly to a savings account, but the return is relatively low.

What’s the difference between term and whole life insurance?

The main differences between term life and whole life insurance lie in the length of coverage and premium costs. Term life insurance usually lasts 10 to 30 years, then expires, whereas whole life lasts for as long as you keep paying premiums. 

Whole life insurance is much more expensive than term life insurance because of the longer coverage period and because it comes with extra features, like a cash value account that earns tax-deferred interest. Term insurance doesn’t have a cash value, which makes it less complicated.

For most people, the convenience and lower cost of term life insurance make it the best choice. But a whole life policy may be a better fit if you need lifetime coverage or another way to invest outside traditional accounts.

Most insurers offer additional coverage options, like roadside assistance or new car replacement coverage that you can add to your policy (just remember that more coverage means higher rates).

Each state has minimum car insurance coverage requirements. Your state’s minimums are a starting point for determining coverage, but they’re too low to sufficiently cover you in the event of a major accident.

 

What is term life insurance?

With term life insurance, you pay premiums regularly for a set period. If you die while the policy is active, your beneficiaries get a death benefit payout.

After 20 to 30 years, many people have fewer financial responsibilities and don’t need life insurance anymore. As long as you don’t need coverage into old age, a term policy is simple and cost-effective.

Pros

  • Affordable premiums

  • Can cancel the policy without any penalty

  • No hidden fees, exclusions, or investment risk

Cons

  • Expires, so you have to buy a new policy if you still need insurance 

 

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What is whole life insurance?

Whole life insurance is a type of permanent life insurance that stays active for your entire life. Whole life is more complex than term life because of its cash value.

The policy’s cash value grows over time at a rate controlled by your insurer. You can use the cash value to take out loans or use it for retirement when the account matures. Some restrictions apply to when you can begin making withdrawals and interest on policy loans.

Term life vs. whole life: Coverage comparison

Below is a quick overview of common term and whole life policy differences, including a cost comparison for 35-year-olds.

 

Policy features

Term life insurance

Whole life insurance

Duration

10 to 30 years

Life

Cost

$25 to $30/month

$25 to $30/month

Guaranteed death benefit

Yes

Yes

Guaranteed cash value

No

Yes

How cash value grows

N/A

Earns interest at a fixed rate

Premiums

Level

Level

Risks

No cash value savings option

Low interest rates and high premiums

Methodology: Estimated term and whole life insurance quotes based on policies offered by Policygenius in March 2022 from our 10 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI, and Transamerica. Rates are calculated based on a $500,000, 20-year term life insurance policy and $500,000 whole life insurance policy paid up at age 99 for 35-year-old female and male non-smokers in a Preferred health classification.

Cost comparisons for whole vs. term life insurance

Both term life and whole life premiums stay the same for the duration of your policy. Because coverage lasts longer and comes with a cash value, whole life insurance is five to 15 times more expensive than a comparable term life policy.

The charts below compare the monthly cost of a $250,000, 20-year term policy and a $250,000 whole life policy for a male non-smoker at different ages.

 

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Policy features

Term life

Whole life

25

$17.22

$199.00

35

$18.95

$288.00

45

35.72

$435.00

55

85.40

692.00

Note that a whole life policy costs as much as 15 times more than term life in the example above for the same death benefit. Visualized another way, the difference in cost is even clearer:

Frequently asked questions

Term life offers affordable coverage for a set period, usually 10 to 30 years. Whole life is a lot costlier because it lasts your entire life and has an investment-like component.

Term life insurance is better for more people because it’s affordable and easy to manage. Whole life insurance is more expensive, but better for people who have a high net worth or long-term dependents.

Term life insurance is cheaper and simpler to manage, but if you need insurance after your coverage expires, a policy may be costly.

Whole life provides permanent coverage, but the policy isn’t cost-effective for most people and the cash value earns low interest.