A life insurance policy is one of the most common ways to plan for your family’s financial future – especially if you’re married, have children, and are one of the primary breadwinners. When you die, your insurance company pays the policy’s death benefits to your beneficiary and that money can go toward anything from medical bills and funeral expenses to mortgage payments and education costs.
Probably the two most common types of life insurance policies are term life and whole life insurance policies. Each has its own upsides and downsides, and those will depend almost entirely on your personal needs and financial situation.
- Term vs. Whole Life Insurance: At a Glance
- What Is Term Life Insurance?
- What Is Whole Life Insurance?
- Term & Whole Life Insurance Cost Comparison
- Should You Buy Term or Whole Life Insurance?
Term vs. Whole Life Insurance: At a Glance
Term life insurance policies are popular, especially among younger people, mostly because of their less expensive premiums. Typically, insurance companies figure term life insurance policyholders are likely to outlive the policy – meaning they’ll never actually cash in on coverage – so they’re able to keep premiums low.
Whole life insurance policy premiums usually are more expensive than term life, but they come with a more stable premium and options to borrow against or cash in on the policy.
|Term vs. Whole Life Insurance Policy Features|
|Policy Features||Term Life Insurance||Whole Life Insurance|
|Policy Duration||1-30 Years||Life|
|Premiums||Start low but can increase over time; generally less expensive than whole life;||Start high but remain the same; can be up to 10x more expensive than term life;|
|Guaranteed Death Benefit||Yes||Yes|
|Accumulates Cash Value||No||Yes|
|Possible Annual Dividends||No||Yes|
>>MORE: Types of Life Insurance
What Is Term Life Insurance?
Term life insurance is a life insurance policy that provides coverage for a predetermined amount of time. Most term life policies range from one to 30 years, in increments such as five, 10, 15, 20, or even 30 years.
If you pass away during your policy’s duration, the insurance company pays a death benefit to your beneficiary; if you outlive your policy, the insurance company pays nothing and you can renew or purchase a new policy, or think about other types of life insurance.
- Premiums usually are low – though they can increase over time. Low premiums mean you’re able to purchase more coverage for less cost.
- You can match the terms to your coverage needs. Typically, people have “temporary” needs in mind when they think about what life insurance can provide their spouse, children, or other beneficiary. For example, paying off a mortgage, covering education costs, or replacing lost income. People who purchase term life insurance can match these needs with the adequate amount of insurance.
- Sometimes, a term life policy can be converted to a whole life policy. Some policyholders choose this route if “temporary” needs turn more permanent. Keep in mind age limits sometimes apply to this option.
SUMMARY: Term life insurance is an extremely simple type of life insurance. You pay your premiums, and the insurance company pays your beneficiary the death benefit if you pass away during the policy’s duration. Usually you have the option to renew, but often it’s at a higher premium.
What Is Whole Life Insurance?
Whole life insurance is a life insurance policy that provides a death benefit throughout your life as well as accumulates a cash value based on a portion of your premiums. Over time, this component allows you to borrow or withdraw from your policy as needed, such as in emergency situations.
Whole life insurance has higher premiums than term life policies, but typically those premiums stay the same throughout your life and offer more perks than you can get with term life coverage such as lifetime coverage and accumulated cash value.
- Your policy might offer premium options. For example, some policies require premium payments until a certain age (usually 100 years old), or there might be a limited payment period during which you fully pay the premium in a specific number of years.
- You could become eligibility to earn dividends depending on your provider’s financial performance. Dividends aren’t guaranteed but if you get them you could cash them in, let them accumulate at a nice interest rate, use them to buy additional coverage with your policy, or even use them to reduce your premium.
- You might want to use your whole life insurance policy for estate planning. Your coverage can act as assets for your spouse or the next generation of your family, or you might use all or some of it for charitable giving.
SUMMARY: Whole life insurance has more going on than term life coverage. You’ll pay your premiums on time, and the insurance company will pay a death benefit to your beneficiary, but that’s where the similarities stop. With whole life insurance, you’ll pay a higher premium but you also get lifetime coverage, cash value accumulation, and eligibility for dividends.
Term & Whole Life Insurance Cost Comparison
Per recent research, these lowest and highest monthly premiums are based on healthy and non-smoking men and women. You can use them to get an idea, but know that your specific quotes will vary depending on gender, age, and health as well as the insurance company itself. We researched rates of 15 providers for term life insurance and 8 providers for whole life insurance. Lowest and highest rates are from these providers.
- Providers of term life insurance in our research: Banner Life (LGA), Protective Life, Pacific Life, AIG Life Insurance (American General), The Savings Bank Mutual Life Insurance Company of Massachusetts (SBLI), United of Omaha, Principal Life Insurance, Cincinnati Life, Haven Life, John Hancock USA, Global Atlantic, Lincoln Financial Group, Prudential, Global Atlantic, and Minnesota Life.
- Providers of whole life insurance in our research: Cincinnati Life, American National, Assurity, Nationwide, AXA Equitable, Securian, Mass Mutual, and The Savings Bank Mutual Life Insurance Company of Massachusetts (SBLI).
|Term vs. Whole Life: Lowest and Highest MONTHLY Premiums|
|Policyholder||Coverage||20-Year Term Life Policy (lowest-highest)||30-Year Term Life Policy (lowest-highest)||Whole Life Policy (lowest-highest)|
|Male, 30 years old||$250,000||$13-20||$19-28||$149-206|
|Female, 30 years old||$250,000||$12-17||$16-23||$132-227|
|Male, 40 years old||$250,000||$18-27||$29-48||$221-315|
|Female, 40 years old||$250,000||$15-23||$24-35||$193-267|
|Male, 50 years old||$250,000||$39-63||$68-103||$336-509|
|Female, 50 years old||$250,000||$31-45||$52-68||$295-410|
Should You Buy Term or Whole Life Insurance?
There are a number of variables to consider when you’re trying to decide between a term life insurance or a whole life insurance policy. An experienced life insurance agent can help you evaluate your circumstances and figure out whether a term or whole life policy is best for you.
Some factors include:
- Your current income.
- Age and health status:
- Your spouse.
- Your children.
- Estimated funeral expenses.
- Your family’s financial needs, including:
- Larger debt that can be paid off (e.g. mortgage, vehicle).
- Smaller revolving bills (e.g. utilities, groceries, gas, insurance).
- Any debt you leave behind (e.g. hospital bills, property taxes).
- Your family’s future financial needs (e.g. college tuition, special needs care).
- Whether you want to set up a trust for your dependents.
- When to Consider Term Life Insurance:
- Your beneficiaries will need financial assistance only for temporary needs such as medical bills and funeral expenses, college or university costs, paying off a mortgage and other bills, and assistance raising children.
- You need the most affordable premium.
- You want to be able to cancel the policy if necessary without losing any value.
- You might want whole life insurance in the future but can’t afford the premium right now. (Make sure the term life policy will convert to a whole life policy before purchasing.)
- When to Consider Whole Life Insurance:
- You’re interested in more substantial estate planning.
- You’ll be leaving behind significant bills or debts that could force your heirs to sell (e.g. property taxes).
- You have a long term or lifetime dependent, such as a spouse or child who has special needs.
- You want to be able to spend your retirement and still leave your children an inheritance.
Life insurance is beneficial to both you and your family — there’s no denying that. However, how beneficial depends entirely on the type of life insurance policy you buy, and that depends on your current situation and your family’s future needs. Compare policy pros and cons and determine what meets both your budget and needs before purchasing a life insurance policy.