The Difference Between Term Life and Whole Life Insurance
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
Buying life insurance can be intimidating. You rarely shop for it, if at all, and confusing concepts only make it harder to understand.
The good news is that the benefits can be a lifeline for loved ones left behind by a breadwinner’s death, and life insurance is relatively inexpensive.
Shopping for life insurance isn’t easy, but there are basically two types: term and whole life insurance. Understanding your insurance options and finding a good life insurance coverage should be relatively easy.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
In this article
What is term life insurance?
Term life insurance is simply insurance you have for a "term." The length of coverage could be from 1 to 30 years but is typically set at 10, 20, and 30 years.
By setting it for a certain amount of time, the insurance is often more affordable than whole insurance, and you pay regular premiums for the duration the policy is active.
The main idea behind term life insurance is that the policy is in effect for the years you’ll need it, such as your working years. If anything should happen to you before retirement, your beneficiaries will receive the benefits. The insurance will be a safety net and help your family or spouse pay the mortgage, college costs, and other expenses they might not be able to with your salary gone if you are gone.
After 30 years, policyholders likely have fewer financial obligations, such as paying off a home where their children no longer live, and they’ve built up wealth and don’t need life insurance in retirement.
When the term ends, the policy expires. This means you are no longer insured, and beneficiaries do not receive payouts. However, you can shop for a new policy or convert your term life policy into permanent life insurance. But since you’ll be 20 or 30 years older, the new policy will likely cost more, and you'll undergo health screenings that could result in higher premiums.
What is whole life insurance?
Whole life insurance is also just what the name implies: for your whole, or entire, life. It’s permanent life insurance that stays in effect for as long as you pay the premiums.
Whole life is a combination of insurance and investment. It is more complicated than term insurance, but the main term to know about whole life is “cash value.”
This money from part of your premium goes into a tax-deferred savings account. The policy’s cash value grows over time. You can borrow, draw from it for retirement, or fund the policy. Some whole-life policies pay out dividends like other investments do. Although permanent policies build cash value, they have a minimum growth rate and are a conservative investment. You’ll likely find better investment returns elsewhere, and this shouldn't be used as your only source of investment.
The benefit of purchasing whole life insurance while you are young is that you will find insurance cheaper than when you are older. Your policy will be based on a 20- or 30-something body rather than a 50- or 60-something body, where diseases and conditions are more likely to be diagnosed, making it more expensive to insure you.
Whole life insurance also benefits those who build wealth and have a complicated financial balance sheet. This insurance is often included with general estate planning. With a whole-life policy, your full inheritance goes to your beneficiaries.
How term life and whole life insurance compare
Here’s a quick comparison of term and whole life insurance:
Term Life Insurance | Whole Life Insurance | |
Coverage duration | 1 - 30 years | Life |
Cost | $25 - $35/month | 5 - 15x more |
Guaranteed benefit | Yes, if within term | Yes |
Guaranteed cash value | No | Yes |
How much does life insurance cost?
The average cost of life insurance among all policy types is $44 per month, according to data from S&P Global reported by Business Insider.
It reported the average term and whole life insurance costs per month for a man in excellent health with a $250,000, 20-year term policy and a $100,000 whole life policy at different ages:
Age | Average term rate/month | Average whole rate/month |
20s | $15.90 | $85.45 |
30s | $16.14 | $122.20 |
40s | $21.75 | $196.25 |
50s | $47.86 | $233.94 |
Many factors go into the price of life insurance, which is listed below. Still, for people 35 and younger, monthly premiums for either type of policy are significantly cheaper than those after age 35. Getting coverage at a young age means locking in a monthly premium for the policy's life.
Life insurance is also cheaper for women than men, especially at age 35 and younger. Women live longer than men, and the premiums are stretched longer, keeping them lower. Look at this example of average monthly premiums for women and men in excellent health both seeking $250,000 worth of coverage for a 30-year term:
Age | Female | Male |
25 | $20.10 | $23.05 |
30 | $21.86 | $23.07 |
35 | $24.19 | $26.48 |
40 | $34.77 | $40.21 |
45 | $48.52 | $61.40 |
50 | $60.31 | $81.72 |
Still, whole life insurance policies are more expensive than term ones.
Changing term premiums
Term life insurance can come in two forms: guaranteed and annual renewable. Each can affect the price of the policy.
Guaranteed-level term insurance keeps premiums the same for the entire policy term. Renewable annual term life insurance must be renewed periodically when the premiums can be raised.
If you need coverage for a short period of time, you might want a renewable annual policy. Premiums are lower than guaranteed-level premiums but rise later.
On the other hand, whole life insurance premiums remain the same no matter how long you have the policy.
With any of these policies, you must make regular premium payments. Otherwise, the policy could lapse, and benefits could be denied if you die.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
What is a guaranteed death benefit?
One term you may hear about when researching life insurance is “guaranteed death benefit.”
Term and whole-life policies each have this benefit: the amount of money paid to your beneficiaries. The life insurance company can’t alter it.
The amount is usually untaxed, meaning your beneficiaries won’t have to pay taxes on the money they receive, ensuring they get the most coverage if you're gone.
However, if you have a whole life and take out a loan against your policy, the death benefit will be used to repay the outstanding amount, leaving less money to your beneficiaries.
What is guaranteed cash value?
Cash value is the part of your policy that earns interest and may be withdrawn or borrowed against.
As discussed earlier, it’s one of the greatest benefits of whole life insurance. It’s “guaranteed,” meaning it has a minimum growth rate.
Term life insurance doesn’t have cash value. It only pays off when you die. You can’t borrow against it or earn money from it while alive.
With a whole-life policy, the life insurance company will pay out the accumulated cash value of the years, minus any loans or fees. This is the investment part of “guaranteed cash value.”
Factors affecting life insurance rates
Age and gender may be the first factors in determining life insurance plans, but other factors will weigh heavily on the price of your premiums. While financial needs set the bar on coverage amount, insurers are also concerned with these factors, affecting life insurance rates.
Smoking
Smokers are more likely to die at least 10 years sooner than nonsmokers, according to the Centers for Disease Control and Prevention (CDC). Quitting smoking before age 40 reduces the risk of dying from smoking-related disease by about 90%, the CDC says.
Research suggests that life insurance is 100 to 300 times more expensive for smokers. This means a 45-year-old man who smoked and wanted to buy a 20-year, $500,000 policy would pay $289 per month for coverage versus about $52 for a nonsmoker.
Risky activities
Do you skydive, scuba dive, or travel overseas to war-torn countries? Your life insurance rates will probably be higher than if you didn’t do such "risky activities."
Your life insurance company may also examine your driving record and charge you more for life insurance if you have many speeding tickets.
Risky activities can go beyond hobbies. If you’re a firefighter or travel for work to countries deemed unsafe, then your insurance rates may be higher — $2.50 to $5 for every $1,000 worth of insurance, according to TrueBlue Life Insurance.
Health history
A full medical exam is typically required before a life insurance policy is approved. Your medical records may also be needed so experts can review your current health and medical history, including hereditary history. A health condition in your family that can lead to early death could raise your premiums.
Pre-existing conditions could exempt you from coverage or make it more costly. These include the most common conditions:
- Diabetes
- Heart disease
- High blood pressure
- High cholesterol
- Obesity
- Cancer
Losing weight, lowering your blood pressure and cholesterol levels, and no longer smoking before you apply for insurance can make it cheaper.
PolicyGenius found life insurance rates increase, on average, 4.5% to 9% year over year, so the longer you wait, the more you will pay, even with a pre-existing condition or health concern.
Length and amount of coverage
It goes without saying that the longer you have a policy, the less expensive the monthly premiums will be. This is because you’re making more total premium payments.
A higher death benefit, such as $1 million compared to a $500,000 policy, will also increase the cost of insurance.
How much life insurance do you need?
To determine how much life insurance you need, you may just want to go with the basics of covering your family’s major expenses if you should die during your main earning years of life.
Paying off your home and having enough money for your children to attend college may be enough if your spouse has a job and other savings to cover living expenses.
Other things to account for include:
- Probable future debts for your family, along with income and assets.
- Final expenses your estate will owe after you die, including credit card debts, mortgage payments, funeral and other things.
- How will your spouse and children support themselves without your salary?
- The standard of living you want your descendants to have.
- Hidden income includes retirement fund matches, health insurance subsidies, and other fringe benefits.
Insurance companies recommend having enough life insurance to cover 6 to 10 times your annual salary. Another suggestion is to multiple your annual salary by the number of years left until you retire: This is the amount of coverage you will want.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
Costs for life insurance with children vs. without
Once you’ve determined what type and how much insurance you need, you can more easily shop for it and get life insurance quotes.
For millennials and Gen Z, with or without children, term life is probably the best option. It’s cheaper than your whole life and will protect your family during most of your working years or at least until your children are old enough to move out independently.
Having children won’t increase your premium, but it will mean that you’ll want more coverage: college, living expenses, and other costs of living should you die while they are young. Instead of a $250,000 policy for 20 years, you may want a $500,000 or $1 million policy for the same term.
Here is an example of monthly policy costs from U.S. News & World Report for a non-smoking woman in average health.
Policy | Age 30 | Age 40 | Age 50 |
10-Year Term | $36.20 | $50.96 | $108.13 |
15-Year Term | $44.94 | $65.64 | $141.11 |
20-Year Term | $51.26 | $80.21 | $173.64 |
30-Year Term | $83.58 | $130.91 | $294.81 |
Whole Life | $706.25 | 1,061.95 | $1,709.76 |
This clearly shows that whole life insurance is significantly more expensive and that buying at age 30 is cheaper than waiting 10 years.
It also shows how the cost of a long-term policy increases, that it’s still affordable, and that having a long-term policy to care for children isn’t out of reach.
FAQs
What are the key differences between term life and whole life insurance?
Term life insurance provides coverage for a specific duration with affordable premiums, offering a death benefit to protect dependents during the term. It does not offer a return on premiums if you outlive the policy. Whole life insurance offers lifelong coverage with higher premiums but includes a cash value component that grows over time, serving as a financial asset.
How does the cash value in whole life insurance benefit policyholders?
The cash value acts as a tax-deferred investment, which policyholders can use for loans, withdrawals, or to pay future premiums. This feature, along with fixed premiums, supports long-term financial planning and offers a financial resource during the policyholder’s life.
What options are available at the end of a term life insurance policy?
Upon the term's expiration, policyholders can renew their policy at higher rates, convert it to whole life insurance (if permitted), or allow the coverage to lapse. These options provide flexibility based on changing financial needs and goals.
Which is the best life insurance?
The decision should be based on your financial goals, coverage needs, and budget. Term life is suitable for temporary, cost-effective coverage, while whole life is better for those seeking lifelong coverage with the added benefit of an investment component. Evaluating the benefits concerning dependents and financial strategies is crucial.
What considerations should be taken into account regarding the interest rates on the cash value of whole life insurance?
Consider the guaranteed interest rate for the cash value component against other investment opportunities. While it offers a safe, tax-deferred growth, its returns may be lower compared to other investments. This underscores the importance of aligning insurance choices with overall financial strategies.
The bottom Line
Of all the things you shop for, try not to let life insurance intimidate you. This is financial protection for your family, and a good insurance agent or financial adviser can help you determine how much coverage you need. From there, you can shop for the best prices.
Term and whole-life policies have their own advantages and disadvantages, so decide if you want a whole-life policy that’s an investment vehicle for your entire life or if you only need term life coverage for a certain number of years.
Your family will thank you for this decision, and hopefully, it will be long ago.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
Share this article
