Term vs. whole life insurance: Which is right for you?
If phrases like term, whole life, and permanent insurance all blend together for you, you're not alone. While you likely know that life insurance will pay a sum of money to your beneficiaries if you pass away, you may not be as clear on term life insurance benefits vs. whole life insurance, which is actually a type of permanent life insurance. 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?
A term life insurance policy 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 example, will your kids be grown up and on their own? Will your house be paid off? Will there still be some money that can provide stability for the surviving spouse?
Use our term life insurance cost calculator to estimate your monthly premiums.
What is whole life insurance?
Whole life is the simplest form of a permanent life insurance policy that provides coverage that lasts your entire life, as long as premiums are paid.1 Unlike term life, 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 account provides many benefits that you can access while you’re still alive. It takes a few years for the money to grow into a useful amount. When it does, you can borrow money against your policy’s cash value in the form of loans or withdrawals,4 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 to understand:
The premium remains the same for life
The policy’s death benefit is guaranteed
The cash value grows at a guaranteed rate
Note that with mutual life insurance companies, such as Guardian, whole life policies can also earn annual dividends (a portion of the life insurance company’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 is that while both pay a death benefit to your beneficiaries, term life only covers you for a set period. In contrast, whole life offers permanent (lifelong) coverage as long as you pay premiums. 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 usually means that life insurance costs for whole life are 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 personal finance needs:
Policy feature | Term life insurance | Whole life insurance |
|---|---|---|
Initial premium | Typically lower than whole insurance | Typically higher than term insurance |
Premium over time | May remain the same or increase over time | Guaranteed to remain the same |
Permanent coverage | No | Yes |
Length of coverage | Typically, 10-30 years. If you buy through work, coverage can be up to a termination age | Lifetime coverage (as long as premium payments are made) |
Health exam required | In most cases, but depends on the amount taken out | Yes |
Cash value | No | Yes – accumulates over time |
Eligible for company dividends | No | Yes – depending on the company |
Ability to withdraw cash value during the life of the policy | No cash value | Yes – withdrawals and loans are allowed (but if unrepaid, this will diminish the death benefit) |
Guaranteed death benefit | Yes | Yes |
Used for estate planning | Not typically | Yes |
Accelerated death benefit | Yes | Yes |
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 and the things that matter to you, including:
Age and health
Your age (The younger you are, the less expensive the policy, generally speaking)
Your health (The better your health prospects, the less expensive the policy, generally speaking)
Your children’s ages (Once they are grown and on their own, they may be able to secure their own income)
Long-term health expenses and the costs of serious illness (Influences the amount of insurance you need)
Financial obligations
Your family’s financial goals
The amount of your mortgage and other debts
Your plans for retirement
College plans for your children
How you will pay for funeral expenses
Estate planning
Estate planning and tax ramifications
If you will set up a trust as part of your will
If you want to leave part of your estate to charity
Existing insurance policies
If 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.
Key pros and cons of term vs whole life insurance
Type of Policy | Term | Whole |
|---|---|---|
Premiums | ||
Pro | Initially lower compared to whole life | Remains same over time |
Con | Can rise substantially at renewal | More expensive than term over the life of the policy |
Coverage term | ||
Pro | Customizable, typically 10 – 30 years; can often convert to a whole life policy later | Protection for life (as long as you pay premiums) |
Con | May need to renew policy at a higher rate when term ends | Can’t choose a specific term |
Cash value | ||
Pro | No cash value | Accumulates at a constant rate, tax-deferred, over time; can access while alive |
Con | No cash value | Outstanding loan amounts will diminish the death benefit payout |
Estate planning | ||
Pro | Not suitable for estate planning | Benefit is paid out tax-free and not subject to probate; can be left to beneficiaries, placed in a trust, or donated to charity |
Con | Not suitable for estate planning | High cost if bought later in life |
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 through 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, but it may lower the death benefit if not repaid.
How much do life insurance policies cost?
Many factors contribute to the cost of a life insurance policy–some you can’t control, others you can. The 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.
Here are examples of potential costs based on a $500,000, 20-year term life policy for male vs. female applicants in excellent health. Rates for whole life insurance policies tend to be significantly higher.
Term life insurance policy quote
Age | Average annual rate for men | Average annual rate for women |
|---|---|---|
30 | $220 | $183 |
40 | $332 | $281 |
50 | $817 | $641 |
60 | $2,361 | $1,656 |
70 | $9,297 | $8,204 |
Source: Quotacy. Lowest three rates for each age and risk class averaged. Data valid as of December 12, 2023.8
What if you already have one type of policy but want another?
No matter which kind of policy you have, you may be able to get the benefits of the other type. For example:
Convert your term policy into a whole life policy: Life insurance companies such as Guardian allow for this, and it can be an excellent way to continue your life insurance policy and build cash value for you to borrow against.
Buy a term policy to help supplement your whole life policy: If you feel you want an added level of protection, for example, to help supplement payment for your children’s college, a whole life policy can be a helpful addition for you to 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, some life insurance alternatives 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 during 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 sub accounts. Like universal life insurance, the flexibility of variable life insurance has a cost, which could impact your overall cash value or death payout.
Annuities are 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.
So, which type of policy should you 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 you need to protect your family?
Which is better for you, a whole life or term policy?
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, your employer may provide life insurance as a benefit, or you may opt to pay for additional life insurance through payroll deductions. Taking advantage of your benefits at work can be a smart and cost-effective way to get financial security 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.