Term vs. Whole Life Insurance: Which Is Better?


Before you decide between a term life and a whole life insurance policy, it’s important to understand the difference between them. Let’s iron out any confusion you may have in order to make the best choice for you and your loved ones. 

What is term life insurance and how does it work?

Term life insurance is life insurance that provides a death benefit (or payout) to a beneficiary if you die during a specified period of time (or term). 

To purchase term life insurance, sometimes you must undergo a medical exam before the insurance company agrees to a policy. However, apart from a medical exam, there are a few other factors that determine how much you’ll pay each year. These include such things as your:

  • Age
  • Family history
  • Gender
  • Personal health history
  • Hobbies
  • Smoking habits
  • Occupation
  • Criminal record
  • Driving history
  • Amount of protection

Generally speaking, the length of the term and the amount of the policy are the two biggest factors an insurance company considers when determining the amount of a premium.

Should you live through your insured term, you have three options:

  • Let the policy cancel and expire
  • Extend the term (in which case you’ll have to go through the application process again)
  • Convert the policy to a whole life insurance policy

Pros

  • More affordable than whole life
  • Payouts are tax free  
  • Good option for parents of young children
  • Larger death benefit than whole life
  • Can be converted to a whole life policy

Cons

  • Expires after the set term unless renewed
  • Price increases with each renewal
  • Must requalify with each renewal
  • Does not build cash value over time

What is whole life insurance and how does it work?

The main difference between term life insurance and whole life insurance is what you would expect: a whole life insurance policy insures you for your whole life as opposed to a specific period of years. Therefore, regardless of when you die, your beneficiary (or beneficiaries) will receive a death benefit. 

The factors that determine how much you’ll pay are the same as the ones listed above, but you’ll pay more for a whole life insurance policy than you will with a term life insurance policy. This is because your insurance company knows it has a payout in its future with your account as long as you keep up with your payments. 

A key difference between whole life and term is that a whole life policy builds cash value with each payment. This savings account earns interest and builds in value over time with each payment. When it comes to this money you have two options: You can take out a loan against it (in which case you’ll pay interest), or you can withdraw it. If you cash out and don’t pay it back:

  • Your death benefit may be reduced
  • You may have to pay taxes on it
  • The money may be subject to numerous fees

However, if you don’t use the money, it’s not given to your beneficiaries. After you die, it is forfeited to the insurance provider. 

Pros

  • Does not expire
  • Payouts are tax free
  • Premiums stay the same

Cons

  • More expensive than term life
  • Smaller death benefits
  • Could get greater returns by investing your money elsewhere
  • Little benefit to the cash value savings account

How to choose the best life insurance policy

Determine your budget. Life insurance shouldn’t lower your standard of living. The only purpose of life insurance is to guarantee your loved ones receive help when they’ll need it most. Do the math and figure out what is a comfortable amount you can set aside each month for life insurance. 

Determine your loved ones’ needs. How much are your monthly expenses? Likewise, how much will your children or loved ones need to get them to their next step in life? Financial experts recommend a life insurance policy that is 6 to 10 times your annual salary.

Determine when you want protection. Are you only looking to financially protect your children while they’re young, or do you have other needs outside of them where you want a guaranteed payout? 

Which is better: term or whole life insurance?

Not necessarily, but for many people a term life policy makes more sense. The payments are much more affordable and the death payouts are big enough to financially secure most beneficiaries. Plus, the money saved with a term life insurance policy could be invested elsewhere. Done soon enough, the interest on this money would overshadow any benefits gained with a whole life policy.   

Wondering if you should purchase a life insurance policy? Learn more about why life insurance is worth it.

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