Term Life Insurance vs. Whole Life Insurance

If you’re shopping for life insurance, you have a bunch of options available to you. Deciding on the best one for you and your family, well, that’s another matter.  

Should you go with term or whole life insurance? Which is better? The differences between whole and term life insurance are like the difference between taking a taxi or driving your own car. They both get you to the same destination, but they serve different purposes. The thing is, even car owners sometimes opt to take a taxi when circumstances warrant; dedicated taxi riders may someday find it useful to own their own car. Neither mode of transport is inherently better than the other — just different. 

The pros and cons of term life vs. whole life insurance

Another way to think about the difference between term life and whole life insurance is to compare it to buying or renting your home. With each option, you get a place to live. But when you rent (term life insurance), eventually, you will stop paying rent and you will no longer live in your rental. When you buy a home (whole life insurance) you could decide to keep your home and live in it forever — even after it’s paid off. In addition, you’ll be building equity that you could turn into cash through a loan or by someday selling your home.¹ 

Here, we’ll dive deep into the features of term and whole life insurance to help you determine the best way to financially protect your family. 

Term life insurance advantages over whole life insurance

Term life insurance is very straightforward: You choose the coverage amount and the window of time you need it.  

You make your regularly scheduled premium payments, and if you die within the term of your policy, your beneficiary will receive the death benefit. If you don’t die during the term, your coverage simply ends and you and the insurer part ways. Like paying for a taxi, you hail a car when you need it and then part ways when you arrive at your destination.  

A term life insurance policy only covers you for a specified time period and only provides you with a death benefit if you die within that time frame. Because the cost of term life insurance tends to be less than a whole life policy with a similar death benefit, it can be an inexpensive way to temporarily get a large death benefit for your family. For example, you may have a mortgage, childcare expenses, other living expenses, future tuition costs or your own student debt on the books. All this could unduly burden your family if you passed away unexpectedly.  

You typically use term insurance as a cost-efficient way to get a death benefit for a need that will go away (when the kids grow up and can support themselves).

Whole life insurance advantages over term life insurance

Just like term life insurance, a whole life insurance policy will pay a death benefit to your beneficiaries upon your death. That’s where the similarities end.  

While a term life policy covers you for a specified time period, a whole life policy will cover you for your life, so long as your policy remains in force. The insurer will pay the death benefit regardless of when you die.  

In addition to providing the death benefit, a whole life insurance policy has benefits that are useful while you’re alive. Whole life insurance accrues cash value as you pay your premiums, which you can use to pay for virtually anything you wish.¹ Depending on your insurance policy and provider, you may even receive dividends that you can use to pay premiums, increase cash value or receive as cash.² A term life insurance policy doesn’t offer any of these benefits. 

Because of the added living benefits, whole life insurance typically carries a higher price tag compared to term life insurance. Back to the car analogy: You’re going to pay more for a car rather than a taxi ride, but there are a host of additional benefits that come with owning your own vehicle (convenience, freedom to drive across the country if you want, hauling things around, handing it down to your 16-year-old).  

People typically use whole life insurance when they want to have a guaranteed death benefit and the cash accumulation that will occur during your lifetime. Many people start with a small amount of whole life insurance and then gradually add more during their lifetime.

Is it better to have both term and whole life insurance?

Although term and whole life insurance are very different products, that doesn’t mean you need to choose between one or the other. In fact, it’s often prudent to have a mixture of both term and whole life coverage to maximize your coverage in a cost-effective manner. Think of it a bit like diversifying an investment portfolio; you can also diversify your financial protection.  

Still not sure which type of policy makes the most sense for you, or how much life insurance you truly need? A financial advisor can help you figure out how much insurance you need and help you see how it fits into a larger financial plan. 

^1.The primary purpose of permanent life insurance is to provide a death benefit. Utilizing the cash values 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. 

^2.Dividends are not guaranteed.