Term vs. whole life insurance: Which is right for you?

If the distinction between term and permanent life insurance, like whole life, seems vague to you, you're not alone. While most people know that life insurance will pay a sum of money to their beneficiaries if they pass away, they may need help explaining the differences and benefits of term life insurance vs. whole life insurance. If you want to help protect your family’s financial future, it’s important to know the basics about these two options.

This article can help you find the best type of life insurance for your needs by answering some key questions about the differences between term vs. whole life insurance:

• What is term life insurance?

• What is whole life insurance?

• What are the pros and cons of each kind of policy?

• What should you consider before buying a policy?

What is term life insurance?

A term life insurance policy is precisely what the name implies: It provides coverage for a specific term or period of time, typically between 10 and 30 years. It is sometimes called "pure life insurance" because, unlike whole life insurance, this policy has no cash value component—it's designed purely to give your beneficiaries a payout if you pass away during the term.

If you get a term policy to help protect your family, you should consider whether your family’s need for life insurance will change before the term expires. For most people, that means the kids are grown up and on their own, the house is paid off, and there’s some money that can serve as stability for the surviving spouse.

Curious about the cost of term life insurance? Use our term life insurance cost calculator to estimate monthly premiums.

What is whole life insurance?

A whole life policy is the simplest form of permanent life insurance, named because it provides coverage that lasts your entire life as long as premiums are paid.¹ Unlike term, it’s not a "pure life insurance" product because it includes a cash value component.² A policy has cash value when a portion of your premium dollars can grow over time on a tax-deferred basis, so you don’t pay taxes on the gains.³

A policy’s cash value provides a number of benefits that you can use while you’re still alive. It takes a few years to grow into a useful amount. Still, once that happens, you can borrow money against your policy’s cash value in the form of loans or withdrawals⁴, use it to pay your premiums, or even surrender it for cash to help supplement your retirement income.

While there are other types of permanent life insurance, whole life is the simplest:

• The premium remains the same for life

• The death benefit is guaranteed

• The cash value grows at a guaranteed rate

Note that with some companies, such as Guardian, whole life policies can also earn annual dividends (a portion of the insurer’s profits) that can increase your cash value and provide other benefits. While not guaranteed, Guardian has paid dividends to participating individual life policyholders every year since 1868.⁵

Key differences between term and whole life insurance

There are several significant differences between term and whole life insurance.

The most significant difference between the two types of policies is that while both pay a death benefit to your beneficiaries, term life only covers you for a set period, while whole life offers permanent (lifelong) coverage as long as premiums are paid. Plus, whole life features a cash value component that accumulates funds over time.

The added value of whole life insurance and the certainty that the insurer will eventually have to pay a death benefit can mean that a whole life policy premium is higher than for a term policy.

Here are some of the other features and differences that can help you decide which type of policy is best for your needs:

What to consider before you buy a whole or term-life policy

Every person is unique, and the decision to buy a whole vs. a term policy should be guided by your specific situation in life and the things that matter to you, including such things as:

• How old are you?

• How good is your health?

• What are your family’s financial needs?

• What are the ages of your children?

• Are you concerned about long-term health expenses and serious illness?

• What is the amount of your mortgage and other debts?

• What are your plans for retirement?

• What college plans do you have for your children?

• How will you pay for funeral expenses?

• Are you concerned about estate planning and tax ramifications?

• Are you setting up a trust as part of your will?

• Do you want to leave part of your estate to charity?

• Do you have existing life insurance, perhaps through your employer?

There may be a considerable cost difference between a term policy and a whole life policy at first, but remember: whole life premiums stay the same over time, and term coverage becomes increasingly more expensive with every renewal. When you consider all the benefits that a whole policy can provide over the course of your life – and the certainty of an eventual payout – you may feel it’s a better overall value, depending on your situation.

Reasons to consider term life insurance

You may want to choose term life insurance if:

• You’re most concerned about coverage for a specific period of time: Term life policies are often used to protect beneficiaries until they no longer need financial protection. For instance, many people with young children purchase a term policy that will end when the children are out of college and able to provide for themselves.

• You want (or need) more cost-effective coverage: Term life insurance typically comes with more cost-effective monthly premiums than whole life insurance— especially if you’re young and healthy. For some, this may be desirable, while for others it’s all they can afford. Remember that you may be able to convert your term life policy to whole life coverage later.

• You aren’t concerned about accumulating cash value: The cash value accumulation offered by whole life is not important to you.

• You want to help supplement a whole life policy: Some policyholders take out multiple policies. They may have a whole life policy but choose to supplement it with a term life policy for a set period of time—say, until their mortgage is paid off or their children are out of the house.

• You want the flexibility of term coverage. There are plenty of different term options — including 10-year and 20-year terms — allowing you to choose the coverage period that best aligns with your circumstances and needs.

Reasons to consider whole life insurance

You may want to choose whole life insurance if:

• You want lifelong coverage: Whole life insurance provides permanent coverage that spans your entire lifetime, as long as premiums are paid. It can be suitable for end-of-life planning and can help cover expenses related to funerals and medical debt. It can also provide ongoing financial support for a spouse or dependent family member, or an inheritance to beneficiaries.

• You can afford the higher premiums: Whole life insurance offers lifetime coverage and other key benefits but can cost you more than term life.

• You want a policy that builds guaranteed cash value: Whole life insurance offers a cash value component that can grow on an income tax-deferred basis, which makes it a popular savings vehicle.

• You have dependent family members: If you have dependent family members— particularly lifelong dependent family members, like a child or sibling with disabilities— whole life insurance can offer significant protection. You can use life insurance to fund a trust to provide care for your dependent family member.

• You want the option to borrow against the cash value of the policy: Once you’ve paid a certain amount into the policy with premiums, you may be able to make a withdrawal or take out a loan against the policy. This may offer financial flexibility later in life, though it may lower the death benefit if not repaid in full.

How much will each kind of policy cost me?

Many factors contribute to the cost of a life insurance policy – some you can’t control, but others you can. Policy type (term or permanent), age, health, gender, driving record, occupation, hobbies, and the amount your loved ones would receive all contribute to the cost. By learning what may impact your premiums before you get a life insurance policy quote, you can better understand your options when choosing what’s best for you and your family.

What if you already have one type of policy but want another?

We’ve talked about the different options and features that a whole life insurance policy provides compared to a term policy and the fact that a term policy may be a more cost-effective way to purchase a given level of the death benefit. But no matter which kind of policy you have, you may be able to get the benefits of the other type. How?

• You may be able to convert your term policy into a whole life policy: Most companies (but not all) allow for this, and it can be an excellent way to continue your life insurance policy and build cash value from which you can borrow.

• You can also buy a term policy to help supplement your whole life policy: For example, if you feel you want an added level of protection to and the possibility to help supplement payment for your children’s college, a whole life policy can build cash value.

Alternatives to term and whole life insurance

Term and whole life insurance are the most common types of life insurance. There are, however, alternatives that you might want to consider.

Universal life insurance, like whole life insurance, is a type of permanent life insurance. Unlike whole life insurance, you can raise or lower premiums within certain limits.⁶ This may make it easier to afford at times of financial stress, but it can also affect cash value growth. Equally important, the total death payout may decline if you make too many minimum premium payments. One more note — with indexed universal life insurance, you can align a portion of your cash value with a stock market index, which gives you the potential for higher returns.⁷

Variable universal life insurance is a type of universal life insurance that offers permanent protections when premiums are paid.⁸ It offers flexibility in terms of premiums and the ability to invest through subaccounts. Like universal life insurance, the flexibility of variable life insurance does have a cost, and it could impact your overall cash value or death payout.

Annuities insurance contracts that you can purchase with a lump sum payment or a stream of premium payments.⁹ In return for your investment, you’ll receive a regular income stream, which can start immediately or at a later date when you are closer to retirement. As with cash value life insurance, the funds invested in an annuity grow tax-deferred.

Annuities can pay you for a set period or for your entire lifetime. Many people purchase annuities to help ensure that they will have a consistent income stream through retirement. Others want to help ensure that their beneficiaries will have a consistent income stream in the event of their death.

After all is said and done, which type of policy should I buy?

The truth is there are many things to consider besides the type of life insurance policy you get. How much coverage do you need? What are all the different policy options (or riders)?¹⁰ Is there other coverage I need to protect my family?

Here’s an easy way to get answers to all those questions: Contact Guardian to find a financial professional who will take the time to learn about your unique situation, listen to your concerns, and clearly explain the different options that best fit your needs and your budget – from a life insurance company that’s been helping protect families for over 160 years.

If you are an employee, taking advantage of your benefits at work can be a smart and cost-effective way to get the financial protection you want for yourself and your family. Consider contacting your HR department to review your plan details and determine how much life insurance may be available to you. Your employer may provide life insurance as a benefit, or you may opt to pay for additional life insurance through payroll deductions.