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Term vs. whole life insurance: Everything you need to know

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Maskot/Getty Images/Maskot

The bottom line:

Both term and whole life insurance help support your loved ones financially when you die.
Term life insurance protects you for a set amount of time.
Whole life insurance protects you for your whole lifetime, as long as you pay premiums in full. Whole life also has cash value.

What’s the difference between term and whole life insurance?

The main difference between term and whole life insurance is that term life is temporary, while whole life is permanent. Term life insurance helps provide simple protection for a set period of time. You can usually choose the term’s length, which is often 10 to 30 years. Term life can help pay off a mortgage or put your kids through school if you were to die. By comparison, whole life insurance provides protection throughout your whole life, as long as you pay premiums in full. It also develops cash value. In exchange for this lifelong coverage and cash value, you can generally expect to pay more for whole life insurance than for term life insurance.

Term vs. whole life insurance comparison

Life insurance exists to help support your loved ones financially when you die. You pay for coverage and, in return, your loved ones receive a benefit when your life ends. Whether you buy term life insurance or whole life insurance will affect how much you pay and how long you’re covered.

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What are the pros of term life insurance?

The advantages of term life insurance include lower premiums and no built-in extras. The pros and cons of your term life insurance are unique to your insurer and the specific contract you sign.

  • More affordable. Term life insurance is generally more affordable than permanent life insurance.
  • You choose the length of the term. Choose coverage length to match your needs (and budget). Contracts often last for 10 to 30 years. You pay for the size of the death benefit you choose and the number of years that you’ll need protection. Term policies are often used by parents who want life insurance until their kids are grown.
  • The death benefit helps your heirs cover financial obligations when you die. Term life insurance is also known as "pure life insurance" because its sole purpose is to provide a death benefit.
  • No built-in extras. This means that you’re not paying for features you might not need—like cash value, investment options or loans. Usually, you’ll still have the option to pay for riders, which are extra benefits you can add to your policy. But they’re not required. So the cost isn’t baked in if you don’t need them.
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What are the cons of term life insurance?

Disadvantages include a limited coverage term and renewal eligibility risks.

  • The term will expire. A term policy has an end date, so if you want to extend coverage later on, you will either have to apply and be approved for new life insurance or do without it.
  • Your insurability status may change. Renewal eligibility risks mean that, if your health worsens and your insurance has expired, it may be tough (or impossible) to find an insurer willing to open a new policy for you. If you do open a new policy, premiums are likely to be higher because you’ve grown older.
  • Premiums may increase on term life policies issued by some insurers. If this applies to you, the increase would happen at the interval outlined in your contract. For example, increases may happen yearly or once every few years. However, most organizations do offer level term policies, in which premiums stay constant. If you sign up for life insurance with a constant premium, your bill will stay the same the entire time the policy is active.
  • It does not build cash value. There is no cash value when your term ends. You won’t have cash value available with a term life policy like you would with a whole life policy.
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What are the pros of whole life insurance?

Whole life insurance is a common type of permanent life insurance. Its advantages include a longer-lasting death benefit, built-in cash value and no renewal eligibility risks.

Longer-lasting death benefit.

With whole life insurance, there’s no 10-, 20- or 30-year expiration date like there is with term life insurance. As long as your insurance organization remains solvent and you make premium payments in full, you’re covered well into the later years of life. That means your beneficiaries will receive a payout if you die immediately after opening your policy—or 40 years in the future. Even if your health worsens, you’ll have insurance. If you're worried about the ability to get insurance later on due to your family health history, whole life insurance may be a good option.

Builds cash value

Cash value is a key reason people buy whole life insurance. During your life, you can take a loan or withdraw funds within the restrictions set by your insurer. Removing money can incur taxes and fees, and change how your death benefit is paid out. So before removing money from your policy, it’s important to understand how cash value life insurance works.

Tax advantages and potential dividends.¹

Cash value within your policy may be able to grow income-tax deferred. So, you may be able to wait to pay income taxes on the growth until you withdraw it from the policy. Dividends may also be available from some insurers. However, they’re not guaranteed.

You may be able to choose how you pay

Payment choices are sometimes available with this option. Instead of a common option for term life insurance—monthly payments—you may have the ability to pay once a year or on another schedule. The range of payment plans can vary from single-premium plans to lifetime payments required. Not all organizations will have all payment options available.

It can support your estate plan

Estate planning is a common use for whole life insurance. People with a high net worth, who have a complex end-of-life financial strategy, may want to consider a whole life policy (or another type of permanent life insurance). Adults with someone who will always be financially dependent on them, like a child with special needs,also find this policy useful.

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What are the cons of whole life insurance?

The main disadvantage is generally higher premium payments that can be ongoing.

Cost

There is a higher cost potential than term life insurance. The cost of whole life insurance can be significantly greater than that of a term policy since the premium is calculated to reflect your potential lifetime. Many people buy whole life insurance only to drop it later because the cost is something they no longer want (or can afford) to cover. Other people choose to reduce the size of their death benefit later on if cost reduction becomes a priority.

Recurring payments2

Ongoing premium payments may be difficult to keep making if your income frequently changes or you lose your job. If you’re not planning to keep this insurance for life (and pay premiums that reflect the longer duration of coverage), you may want to consider term insurance.

Cash value may include fees and tax implications

Fees and tax implications can arise when you access the cash value of this policy. A whole life policy’s cash value isn’t as easily accessible as the money in your bank account. Removing money can incur taxes and fees, and lower the value of your death benefit. Removing too much money can terminate your coverage.3

May have a lower growth rate than other investments

Whole life insurance has a lower cash value growth rate than the potential growth you might see with other investment strategies.

Note that the pros and cons of your permanent life insurance are going to be unique to your insurer and the specific contract you sign.

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Which is better: Term or whole life insurance?

Whether term or whole life insurance is better varies from person to person based on lifestyle, timeline, financial goals and strategy. Term life insurance is a useful, standard product for most people who need life insurance. It provides the main value of life insurance—a death benefit to help support your loved ones financially when you die. Whole life insurance provides that same support, plus extras like cash value and potentially tax-deferred cash growth. In exchange for the extra features, it costs more.

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Term vs. whole life: comparing costs

As a rule of thumb, term life insurance costs less than whole life insurance. When comparing costs, think about what you can afford to pay for the next 10 years (or more). With whole life insurance, you’ll have cash value and a forced savings mechanism.

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Why is whole life insurance often more expensive than term?

Whole life insurance is often more expensive than term insurance because it provides longer-lasting coverage, cash value, and the potential to earn interest on the cash value in the policy. Your insurance provider knows it will have to pay your beneficiaries (your loved ones) no matter when you die. The financial payout is a guaranteed expense for your insurer. So, you typically pay higher premiums to have that money set aside for when you die.

With term life insurance, however, the insurance provider only pays if you die within a set time frame. That means the insurer won’t necessarily have to pay your beneficiaries, so it doesn’t have to keep guaranteed money set aside. That means you may pay less for term life insurance than for whole life insurance.

Can you convert your term life insurance into whole life insurance?

If your term life insurance comes with a conversion option, you may be able to convert it into whole life insurance. When converting, some or all of the death benefit is applied toward opening the whole life insurance policy. You can expect higher premium payments after you convert the policy. Read our article about converting term to permanent life insurance to learn more.

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When should you buy both term and whole life insurance?

You might consider buying both term and whole life insurance when you’re under-insured or pursuing a more complex financial strategy. When you buy both, it means you will have two different premiums to pay. It will also add an extra step to executing your estate when you die. Despite this extra work, the benefits of having both policies might be worth it for some people. Here are three scenarios where it may make sense for some people to consider purchasing both term and whole life insurance:

1. You bought a whole life policy with a too-small death benefit.

You may have bought a whole life policy early on. If you’re now realizing that the death benefit it would pay to your heirs is too small, you could consider adding a term coverage layer. Adding term life insurance to supplement your permanent policy is one potential way to bridge a coverage gap. (You can find out if you have a life insurance coverage gap with our life insurance calculator.) However, this isn’t the only approach. So be sure to investigate other options as well.

2. You are pursuing a “ladder” strategy.

Buying multiple life insurance policies with varying lengths can be one strategy for cost savings. Usually, a ladder strategy stacks 10-, 20- and 30-year life insurance policies on top of each other. This changes the amount of death benefit available to your heirs over time. It usually provides less coverage as time passes, according to your needs. It’s more complicated to manage this strategy compared to buying a single life insurance policy. There will be multiple bills to pay each month. And there will be an extra step to executing your estate when you die. But the cost savings may make the extra work worth it for some people. Whole life insurance may fit into a ladder strategy that includes permanent protection.

3. You want your policy to act like term life insurance now and whole life insurance later.

Maybe you want a larger death benefit for your heirs if you die soon, and a guaranteed (but smaller) death benefit if you die later on. If so, blended life insurance may be worth considering.

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What is blended life insurance?

Blended life insurance is a single product that combines the benefits of term and permanent life insurance. At the start of the coverage period, it provides benefits similar to term coverage. It can help cover things like college, a mortgage and funeral expenses if you pass away. Then, later on, this type of policy starts to act more like whole life insurance. Cash value that you can access while you’re alive becomes available.

The premiums for blended life insurance may be lower than for whole life. That’s because blended life policies include a term component. If you’re looking for dividends, it’s worth noting that dividends (when received) are usually lower for blended life insurance than they are for a whole life policy. Lower dividends can affect how the cash value inside your policy grows. If you choose to use dividends to increase your death benefit over time, it can change how your coverage amount increases.

Ready to learn more about your life insurance options? Connect with a financial advisor near you.

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1 Thrivent and its financial professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

2 Reducing premiums or skipping a premium payment will affect your accumulated value.

3 Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.

This webpage provides general life insurance information. It does not contain information specific to a Thrivent financial product. If you are looking for information specific to a Thrivent financial product or your existing life insurance contract, please log in and refer to your contract or prospectus document—or visit the life insurance product webpages.

Life insurance guarantees are based on our financial strength and claims-paying ability. Your contract will have exclusions, limitations and terms under which your benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, talk with a licensed insurance agent/producer.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.
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