Mother with daughter after deciding if term vs whole life insurance was right for her family.

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Term Life Insurance vs Whole Life Insurance: What You Need to Know

Making a decision on what kind of life insurance to get is crucial. Learn the differences between term life and whole life insurance here.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

The debate surrounding term life insurance vs whole life insurance is justified. If for nothing else, the two policies have more in common than not. Both are excellent vehicles for replacing capital that may be lost upon the untimely death of a policyholder. Perhaps even more importantly, both options award policyholders the utmost “peace of mind” when it comes to the financial security of loved ones. That said, there are differences which can force prospective policyholders to pit term life insurance vs whole life insurance.

If you are one of the many people debating term life insurance vs whole life insurance, don’t worry; you’re not alone. Plenty of people are currently wondering which policy is best for their unique circumstances. Please keep reading to find out which one is right for you. This guide will teach you everything you need to know about term life insurance vs whole life insurance, including:

What Is Term Life Insurance?

Term life insurance is exactly what it sounds like; it’s a life insurance policy that covers a fixed term or period in someone’s life. Unlike its whole life counterpart, which lasts an entire lifetime, term life insurance is relegated to a predetermined duration, oftentimes ranging anywhere from 10 to 30 years. Due to their shorter nature, term life insurance plans are more affordable than whole life plans.

Outside of their limited time and more cost-effective insurance premiums, however, term policies aren’t all that different from whole life policies, with one major exception, of course: beneficiaries are only eligible to receive the death benefit if the insured individual dies during the agreed upon term. Consequently, no death benefit will be paid out if the insured individual remains alive when the term expires and coverage terminates.

Due to their more flexible and shorter nature, term life insurance policies are often closely associated with a specific financial obligation. Whether it's a thirty-year mortgage or taking care of a newborn child until they are no longer a dependent, prospective term life policyholders will attempt to insure their financial contributions for the duration of some of life’s biggest expenses. 

What Is Whole Life Insurance?

As its name suggests, whole life insurance is a life insurance policy designed to remain in effect for as long as the insured person is alive and up-to-date on premium payments. As a form of permanent life insurance which lasts an entire lifetime and pays out its death benefit regardless of when a death occurs, whole life insurance coincides with much higher costs. Insurance companies are more inclined to charge higher rates for death benefits that are more likely to pay out. 

It is worth noting, however, that whole life insurance policies are considerably more expensive than their term counterparts; not only because they span an entire lifetime and all but guarantee the death benefit, but also because of their ability to accumulate cash value in the form of interest. You see, most whole life insurance policies offer a cash value component.

When a whole life insurance premium is paid, a portion of the capital is allocated to a subsequent cash value account. The cash designated for the account is able to compound with the help of more deposits and earning interest, either at a fixed or variable rate. Once enough capital has accumulated, policyholders may borrow against the account or surrender it for the compounded cash component. There’s no need to pay back the borrowed amount, but it will be deducted from the final death benefit.       

Term Life Insurance vs Whole Life Insurance: What’s the Difference?

Most of the differences between whole and term life insurance are relatively surface level. In fact, their own names stop just short of identifying exactly what they do. Term life insurance only covers a fixed period of time and whole life insurance covers a policyholder’s entire life. That said, there are several differences beneath the surface that need to be accounted for.

One of the biggest differences between the two is that whole life policies have a cash component and term policies do not. Consequently, premiums applied to term policies simply pay down the debt obligation. Premiums applied to whole life policies, on the other hand, allocate a portion of the cash into an interest-accruing account. The cash in the account compounds as more premiums are paid and interest accrues. Once the account grows large enough, policyholders are awarded the opportunity to borrow against the money in the account — a benefit that’s not awarded to term policyholders.

Another primary difference between whole life and term life insurance is the price levied on policyholders. Whole life insurance policies aren’t simply more expensive; they are a lot more expensive. While premiums for term policies will vary based on the amount of years covered, whole life policies can range anywhere from five to 15 times more expensive than term policies.

Last, but certainly not least, is the rate at which each policy pays out its death benefit. On the one hand, whole life insurance policies always pay out death benefits, as long as the policyholder is up-to-date on premium payments. Term life insurance policies, however, do not pay out a death benefit if the policyholder lives past the expiration of the term.

There are important differences to note between each policy, not the least of which should go into making your own decision. Therefore, you should weigh the pros and cons of each when debating term life insurance vs whole life insurance.   

Term vs Whole Life Insurance Pros & Cons

Not all life insurance policies are created equal. In fact, the differences between all of today’s options are inherently an advantage for impending policyholders. Nonetheless, if you are debating between whole and term life insurance, it may be a good idea to weigh the pros and cons of each. 

Term Life Insurance Pros:

  • Affordable premiums: With finite policy periods and more restrictive underwriting, insurance companies can afford to offer term life insurance at a more affordable premium than its whole life competitors. 

  • Flexible terms: Term life insurance allows policyholders to pick and choose the length of their overage. Oftentimes, the duration of the coverage will cover a specific financial obligation, like a mortgage or raising a child until they are no longer dependent on another’s income. 

  • Low barrier of entry: Term life insurance is easier to apply and qualify for than whole life insurance. Prospective policyholders can apply online or over the phone in as little as a few minutes.

  • Fixed premiums: Most term policies coincide with fixed premiums, meaning payments will not fluctuate in a volatile interest rate environment.

  • Optionality: Some life insurance companies allow their term policies to be renewed or converted to whole life policies. 

Term Life Insurance Cons:

  • Finite coverage: While meant to cover predetermined periods of time, some may view the finite coverage as a disadvantage. In the event an untimely death occurs after the coverage expires, death benefits will not be distributed.

  • No cash component: Term life insurance premiums do not pay into an interest-accruing account, which means no cash is compounding and policyholders aren’t able to borrow against it.

Whole Life Insurance Pros:

  • Cash value component: When policyholders pay their premiums, a portion of the cash is allocated to an interest-accruing account. In the account, cash is able to compound and policyholders may be able to borrow against the policy at a later date.

  • Whole life coverage: As its name suggests, whole life insurance covers a policyholder’s entire life. As a result, beneficiaries are guaranteed a death benefit if the policyholder maintains their premium obligations.

  • Fixed premiums: Similar to term policies, whole life policies tend to be sold with fixed premiums.

Whole Life Insurance Cons:

  • Relatively expensive: Whole life insurance policies can be expensive, relative to term policies. In fact, whole life policies can run upwards of five to 15 times more than term policies.

  • Mediocre returns: Whole life insurance may award a generous death benefit, but returns on the cash component of whole life policies tend to underperform compared to other investments.

Is Whole Life or Term Insurance Better?

To be perfectly honest, there is no universal answer to the question “is whole life or term insurance better,” but one fact remains: Life insurance is one of today’s greatest vehicles for securing the financial future of loved ones. In particular, life insurance can be used as a complement to both probate and estate planning. How policyholders go about doing so, however, is entirely dependent on their own needs. 

As a result, there are still plenty of people debating term life insurance vs whole life insurance, and for good reason. There are plenty of benefits to be had in each policy, but the decision ultimately comes down to which one works best for you. Weigh the pros and cons of each, as they pertain to your circumstances and needs, and proceed to apply for the policy that makes the most sense for you.

Here at Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today! 

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