Life insurance policy types can be put into two main buckets: term life and cash value life insurance. One of the choices for cash value life insurance is whole life insurance. There are other cash value choices, too.
Knowing the main differences between term vs. whole life insurance will help you zero in on the best life insurance for you.
Term vs. Whole Life Insurance
There are two main differences between term and whole life insurance: Premiums and cash value.
Term life insurance lets you lock in level premium payments for the term length, such as 20 years. Many term life policies allow you to renew each after the level term ends, but the renewal rates are usually very expensive.
Term life insurance is generally the most affordable type of life insurance because you are buying purely life insurance coverage. There is no cash value within a term life insurance policy.
If you decide to end a term life policy, you can simply stop paying premiums. If your policy expires while you are still alive, there is generally no refund of premiums.
Whole life insurance also has fixed premiums, and you’ll generally pay for the duration of the policy. A whole life policy will build cash value at a steady, fixed rate. You can take out this money via a policy loan or a withdrawal.
If you decide to end the policy, you should notify the insurer so that you can get a surrender value of the policy.
Key Differences Between Term Life Insurance and Whole Life Insurance
Comparing the Cost of Term vs. Whole Life Insurance
It’s impossible to make an apples-to-apples cost comparison of term life vs. whole life insurance because the policy features are so different. If you’re looking for a long stretch of coverage with term life, look at 30-year term life policies. Banner Life (part of Legal & General America) and Protective Life offer 40-year terms, which is currently the longest level term available.
Whether you decide to buy term or whole life insurance, your life insurance quotes will be affected by:
- Your age and gender.
- Amount of coverage.
- Your current and past health.
- Your family’s health history (parents and siblings).
- Your prescription drug history.
- Other factors such as your driving record.
Term vs. Whole Life Insurance Cost Examples
What Is Term Life Insurance?
Term life insurance is a contract between the policyholder that says the insurer will pay a certain amount to the policyholder’s beneficiaries if the insured person passes away.
People buying term life insurance must decide on the length of the level term and the coverage amount.
Term life insurance policies come in multiple types:
- Level term: A level term life insurance policy has the same premiums and death benefits throughout the level term length of the policy, such as 10, 20 or 30 years. After the level term period, rates will go up every year if you renew. Alternatively, you could get quotes for a new policy if you still need life insurance.
- Annual renewable term: A person with an annual renewable term life policy must renew it each year from the start, and will see higher rates as they age.
- Decreasing term: Premiums stay consistent with a decreasing term policy but the death benefit decreases during the policy’s term. One type of decreasing term life policy is mortgage life insurance. The death benefit drops as you pay off your mortgage, though the premiums remain the same.
- Return of premium term life: A return of premium term life insurance policy returns your premiums if you outlive the policy. This policy type is much more expensive than other types of term life.
Benefits and Drawbacks of Term Life Insurance
As with any type of life insurance, there are pros and cons to term life insurance. Shopping with these pros and cons in mind can help you find the best policy for your needs.
A Summary of the Pros and Cons of Term Life Insurance
Benefits of Term Life Insurance
What Is Whole Life Insurance?
Whole life insurance is a form of cash value life insurance that remains in place as long as you make your payments.
There’s a cash value component that accrues over time. You can access your cash value through a withdrawal or loan, or you could surrender the policy and walk away with the cash value (minus any surrender charge).
Benefits and Drawbacks of Whole Life Insurance
Whole life insurance includes various guarantees, but not without a cost. Take a look at the pros and cons of whole life insurance.
A Summary of the Pros and Cons of Whole Life Insurance
Compare the Features of Term Life vs. Whole Life Policies
Premiums
Both level term life and whole life have fixed premiums. That means your premium payments won’t change. Life insurance companies generally offer payment plan choices, such as monthly, quarterly, semi-annually and annually.
If lifelong bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payments, such as single premium life insurance, or policies with payments for a certain number of years, such as 10 years. This allows you to have more budget flexibility later in life.
Payouts
Whole life and term life policies have a payout called the death benefit. The death benefit is guaranteed with both types of policies. A death benefit is paid tax-free to the life insurance beneficiaries you have listed.
The main difference is that coverage ends with a term life policy if you don’t renew it every year after the level term period ends. If you outlive your term life policy and don’t renew it, there is no death benefit ever paid.
Cash Value
Term life insurance builds no cash value while whole life policies contain a cash value account that builds over time at a fixed earnings rate.
This guaranteed cash value growth in a whole life insurance policy is one of the reasons whole life is considerably more expensive than term life.
The policyholder can take money from the available cash value. You can take a loan against it and pay for anything you want. Or take out money as a withdrawal that you won’t pay back. The outstanding loan or withdrawal amount is deducted from the death benefit.
Any cash value in the policy usually reverts to the insurance company when you pass away. Your beneficiaries receive the face value of the policy minus any amount that was taken out of cash value and not paid back.
If you’re looking for lifelong coverage without the high cost that a whole life insurance policy demands, consider guaranteed universal life insurance.
Ending a Policy
While you do your best to anticipate financial needs many years down the road, you might find you no longer need life insurance.
- With term life insurance, you can stop paying, which terminates the policy. Since there’s no cash value, there’s no money to walk away with.
- With whole life insurance, you may have cash value to take away if you surrender the policy.
If you don’t tell your insurer that you want to surrender your life insurance policy, the insurer will likely use any cash value in the whole life policy to continue paying the premiums on your behalf until the cash value is depleted. Instead of walking away, contact the insurer and take the surrender value, which is the cash value minus any surrender charge.
How to Choose Between Term Life and Whole Life Insurance
When choosing between term life and whole life insurance, consider your reasons for buying a policy. If you want life insurance to replace your salary for the 15 years until your youngest child leaves for college, you don’t need the hefty expense of whole life insurance. Term life insurance is a much cheaper option if you need coverage for a set number of years.
Term life insurance may be a good fit if:
- You have a specific debt, such as a mortgage, that you want covered if you pass away.
- You have children and want to make sure their college tuition is covered.
- You want life insurance to cover a certain period of time, such as the number of years you have until retirement.
Whole life insurance may be a good fit if:
- You want lifelong coverage.
- You want to fund a life insurance trust.
- You have a dependent who needs lifelong financial support, such as a special needs child.
- You want life insurance that builds cash value you can access during your lifetime.
- You want to ensure there’s a death benefit to provide money for funeral expenses regardless of when you die.
Can I Switch Life Insurance Policies?
Years after buying life insurance, you might find that the policy you picked is no longer the best for your needs. It happens. Finances and life’s circumstances evolve. There are potentially ways to reverse course without buying a new policy.
Changing Term Life to Whole Life
Term life insurance policies often include a term life conversion option that allows you to convert the policy to a permanent life insurance policy. There’s a deadline for doing this, so check your policy for the conversion period. Your life insurance may have a few choices of permanent life insurance for the conversion. Or it may offer only one conversion option, and it might not be a whole life insurance policy.
Changing Whole Life to Term Life
If you’ve built up cash value within a whole life policy, you can ask your insurer if you can use the cash value to switch to a term life policy that’s paid up and end the whole life policy. Your life insurance company will be able to tell you the length of the new term life policy based on the money in your cash value account.
Pairing Term and Whole Life Insurance Together
You can have more than one life insurance policy, and in some cases it makes sense to have more than one policy.
For example, you might buy a whole life policy for mainly funeral expenses and also buy a 30-year term life insurance policy that would serve as income replacement if you pass away during your working years.
Buying different life insurance policies for various purposes is known as laddering life insurance. A financial advisor can help you decide whether you might want to ladder life insurance.
Alternatives to Term and Whole Life Insurance
There are life insurance alternatives beyond whole life and term life. Universal life insurance, for example, can offer cash value and coverage for the duration of your life, and is often cheaper option to whole life insurance.
Guaranteed Universal Life Insurance
Guaranteed universal life (GUL) insurance is the lowest risk universal life policy and is typically the cheapest type of universal life. Guaranteed universal life insurance provides a level death benefit and your premiums don’t change. But GUL policies also generally build minimal cash value.
GUL policies don’t allow you to adjust premiums, which is typically an option in other types of universal life insurance policies.
Indexed Universal Life Insurance
An indexed universal life insurance policy bases cash value growth on gains connected to an index, such as the S&P 500. It offers more flexibility than GUL insurance by allowing you to adjust premiums and death benefits, within limits.
Indexed universal life insurance generally has high policy fees and charges. These charges reduce the amount of money going toward your cash value.
Variable Universal Life Insurance
A variable universal life insurance policy links your cash value to sub-accounts that contain stocks, bonds and fixed interest rate options. You can adjust premiums and death benefits, which is similar to indexed universal life.
You’ll need to take an active role in deciding on the investments when you have a variable universal life insurance policy. Your decisions on your sub-accounts affect your cash value gains and losses
Burial insurance
Also called final expense and funeral insurance, burial insurance is generally a whole life insurance policy with a relatively small death benefit meant to pay for final expenses.
These policies are typically guaranteed issue life insurance, which means you can’t be turned down and there’s no life insurance medical exam.
Burial insurance policies are more expensive than other types of coverage but can be the only option for older life insurance buyers who are in poor health.
Supplemental Life Insurance
Employers may offer life insurance to employees at low or no costs. These group policies are usually connected to your employment, so you lose coverage if you leave your job.
Supplemental life insurance policies usually have death benefits (such as a small multiple of your annual salary) and generally shouldn’t be your sole life insurance coverage. But they can be a nice way to supplement your own individual life insurance.
