Key takeaways
Term life insurance covers you for a set period of time, while whole life insurance covers you for your entire life (as long as your policy is in place).
Term life insurance premiums are often lower than whole life insurance premiums for the same amount of coverage, but whole life insurance policies also accumulate a cash value that grows over time.
You don't necessarily have to choose between term life insurance or whole life insurance—you could have some of each.
Sean McGinn is an assistant director of Product Positioning in the Risk Products department at Northwestern Mutual.
When choosing a life insurance policy, a key factor to consider is the type of policy: term life insurance or whole life insurance (a type of permanent life insurance).
Generally, term life insurance is the most cost-effective way to get a large death benefit for a limited period of time. Whole life insurance has a larger out-of-pocket premium than a similar term policy, but it can last for your lifetime and builds cash value that you can access during your life.
It’s also possible to have both term life insurance and whole life insurance at the same time. And whether you go with term, whole or a combination of the two, the death benefit is typically tax-free for your beneficiary.
Here we’ll walk through the basics of each type of insurance and compare the two. We’ll also highlight the steps you can take to help find the right policy for your budget, family and future.
What is term life insurance?
Term life insurance is a type of life insurance policy that pays a death benefit if the insured person dies during a specified term. The term might last 10 or 20 years, or it could last until the insured person reaches a certain age, like 80. If the policyholder is still alive at the end of the term, no death benefit will be paid out.
Term life insurance policies also have no cash value component, so policyholders don’t get any value from a term life insurance policy beyond the death benefit if it’s paid out.
Benefits of term life insurance
Affordability
Because term life insurance covers a fixed term rather than an individual’s entire life, premiums are lower than they would be for a whole life policy with the same size death benefit. This also means that with term life insurance, the same premium would buy a larger death benefit than it would with a whole life policy.
Flexibility
You can choose the time period you want to cover—for example, a 10- or 20-year term or until a certain age, such as 80. Many term policies will also allow you to convert to whole life insurance without having to take another medical exam.
Limitations of term life insurance
Coverage will end
Term life insurance lasts only as long as the term you select. Once the term is over, you won’t owe any additional money, but you will no longer be covered.
No cash value
Term life insurance does not include a cash value component like whole life insurance does. Cash value can provide a source of liquidity over time that you can access during your lifetime.
How term lengths work
Term life insurance policies are typically offered in two main categories: level term and annually renewable term. Level term policies tend to last for a set number of years, like 10 or 20.
As the name suggests, what you pay for a level term policy remains the same each year. Annually renewable term policies typically last until you reach a certain age. The cost of an annually renewable term policy will typically be very cost effective when you’re young but will increase over time.
When considering a term life insurance policy, it’s a good idea to think through the following:
Amount of coverage needed
Consider all of the financial obligations you would want covered if you died during your policy’s term. These can include your children’s educations, support for a nonworking spouse, mortgage payments, unpaid debt, or simply living expenses.
Our life insurance calculator can help you get a sense of how much term or whole life insurance you might need.
Length of time you’ll need your death benefit
If you have children that you plan to support until they are financially independent, you’ll have to estimate when that will be. For some it may be until college graduation, and for others it may take longer.
If you have a spouse or aging relatives you support, you’ll likely want to consider a longer term or whole life insurance. And even if your spouse works, you may still need to replace your income so that your family can stay in the same home, attend the same schools and maintain the lifestyle they are used to.
Future sources of funds
How much retirement planning have you and your spouse done? The fewer sources of retirement income you have, the more coverage you may need to support the other if one of you passes away.
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What is whole life insurance?
Whole life insurance is a type of insurance policy that lasts for your entire lifetime, paying a death benefit to your beneficiaries when you die (rather than if you die) and providing a cash value component that you can access for any reason during your life. Some whole life insurance policies also pay dividends that can be used to increase the value of your policy, used to reduce your premiums or taken as cash.
Benefits of whole life insurance
Lifetime coverage
Whole life insurance lasts for your full lifetime. As long as you pay your premiums, your beneficiaries will receive a death benefit, no matter when you die.
Cash value
As you pay for your policy premiums over time, your whole life insurance policy will grow cash value. Over time, this can become a significant amount of money that you can access for any reason (although doing so could lower your death benefit). This ability to borrow against your life insurance makes it a flexible financial tool. Just keep in mind that if you pass away with the loan outstanding, it will reduce the amount of money your loved ones get.
Dividends
Some insurance companies may pay dividends on whole life insurance policies, which can be taken as cash, used to pay premiums or used to increase the value of your policy (both death benefit and cash value). While a dividend is not guaranteed, some companies have a long history of paying them. Northwestern Mutual has paid a dividend every year since 1872.
Limitations of whole life insurance
Higher premiums
Whole life insurance premiums are higher than term life premiums for the same death benefit. If you’re on a tight budget and want whole life insurance, you may have to go with a smaller death benefit versus what you would get with term life insurance. This is one example when owning a combination of the two types can be helpful.
More complex than term
Term insurance is pretty straightforward, but whole life and other forms of permanent life insurance have extra features to consider. That’s why it’s a good idea to consult a financial advisor to talk through your options before choosing the best policy for yourself.
How much does whole life insurance cost?
The cost of life insurance premiums varies with age, health and gender. The cost of getting whole life insurance, like all life insurance, goes up as you get older or your health changes. Gender also plays a role: Women live longer than men on average, so women are considered less risky to insure and tend to pay lower premiums than men do for the same coverage. The best way to get as low a premium as possible is to apply for a policy at a young age.
Converting term to whole life insurance
When you get a term life policy, it may include the option to convert to whole life insurance. This option lets term policyholders enjoy the benefits of a whole life policy without undergoing a new medical exam.
It’s best to do this as soon as you can because there may be time limits for when certain conversion benefits are available.
Premiums are typically based on your age at the time you convert, so the sooner you make the change, the more permanent death benefit you will be able to get for a given premium amount.
Finally, the sooner you convert, the longer your cash value has to grow. Like all things that involve compounding interest, the longer the time horizon, the better the appreciation.
Get a life insurance quote.
Your advisor can show you different options, benefits and costs tailored to your needs.
Connect with your advisorHow to choose term life vs. whole life
Life insurance is an essential part of a comprehensive financial plan. Your policy should always be personalized for your circumstances, taking into account your budget, family and future. When you compare whole life insurance vs. term life insurance, you'll want to consider all of the following factors:
- How much of a death benefit do you need?
- How long will your dependents need financial support?
- How much can you afford in premiums?
- Will you benefit from having access to the cash value in your life insurance policy?
- Are you in good health?
You’ll also want to balance different aspects of your financial plan, including life insurance, retirement contributions to an account like an IRA or 401(k) and an estate plan.
Your Northwestern Mutual financial advisor can help compare the pros and cons of whole life insurance to those of term life insurance and help you choose the best policy to meet your needs. We offer a variety of whole life insurance policies—ones that consistently pay attractive dividends year after year. Connect with your financial advisor to learn more.
Utilizing the cash value through policy loans, surrenders or cash withdrawals will reduce the death benefit and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Dividends are not guaranteed.
