Term vs. whole life insurance: Pros, cons and what's right for you

Both term and whole life insurance are designed for the primary purpose of providing a generally tax-free death benefit to your beneficiaries when you die. The most notable difference between term and whole life insurance is that term life is temporary, while whole life is a type of permanent life insurance. Let's dive deeper into the full differences to help you make an informed decision on which type is right for you.

This article covers:

• How term insurance works
• How whole life insurance works
• The pros of term life insurance
• The cons of term life insurance
• The pros of whole life insurance
• The cons of whole life insurance
• A term vs whole life comparison at-a-glance
• How blended life insurance has components of both term & whole life
• How term to permanent contract conversions work
• Are there times where you should buy both term & whole life?
• Which option is better for you?

Term life insurance helps provide simple protection for a set period of time, typically offering 10, 15, 20 and 30 year contracts. Its sole purpose is to provide a death benefit to your dependents when you die.

Term is the most affordable type of life insurance. Once the insurance is in place, you can lock in premiums so they won’t change for the term of the contract. As long as you pay the premiums, coverage remains in force during the term you select and benefits are paid at death.

Whole life insurance is a type of permanent life insurance that is guaranteed to last a lifetime, as long as you pay the premiums. Besides having a death benefit, it builds cash value that you can access during your life to pay for expenses.

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.

The advantages of term life insurance include lower premiums and no built-in extras.

• It's affordable. Term life insurance is generally more affordable than whole life insurance because its sole purpose is the death benefit. With term life, you’re not paying for features you might not need—like cash value or loans. Usually, you’ll have the option to pay for riders, which are extra benefits you can choose to add to your policy.

• You can choose the length of the coverage. You are able to choose term coverage length to match your needs and budget. Contracts often last from 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.

• It may be convertible into a permanent policy. If you decide you want to make your term policy a permanent policy later on, it may be convertible.

Disadvantages include a coverage end date 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. 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.
  

• It does not build cash value. Unlike whole life insurance, there is no cash value component when your term ends.
  
• 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 insurance providers 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.
  

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Life insurance:
A conversation guide

From vacations to college dreams, creating life plans with loved ones is one of the many joys in life. But when it comes to more sensitive topics, like unexpected death, it can be tempting to avoid the topic. But self-reflection and a family conversation can help you prioritize what's most important to you.

See the guide

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.

• Coverage that lasts a lifetime. With whole life insurance, there’s no expiration date like there is with term life insurance. As long as you make premium payments in full, you’re guaranteed to be covered for life. That means your beneficiaries will receive a payout if you die immediately after opening your policy—or 40 years in the future.
  

• It builds cash value. When you pay your premiums, a portion is dedicated toward building tax-deferred cash value, which is guaranteed to grow. This money can be accessed by withdrawing funds or taking a loan against the cash value to pay for personal expenses such as emergencies, education or retirement.¹
  

• The potential to earn dividends. Participating whole life insurance policies may earn dividends, money an insurance company distributes to eligible clients when the company performs better financially than it expected for the year (though it’s never a guarantee). These dividends can enhance the policy’s overall value and offer potential returns on your investment by allowing you to increase your policy’s cash value, purchase additional coverage or receive cash payments.
  

• 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, may find this type of policy useful.

The main disadvantage is generally higher premium payments and potential implications of using the cash value.

• It costs more than term. 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 they no longer want (or can afford) to cover the cost. Other people choose to reduce the size of their death benefit later on if cost reduction becomes a priority.
  

• You need to keep up with recurring payments. 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.
  

• The cash value typically grows slower than other investments. The growth rate may be lower than other traditional investments like stocks, bonds, mutual funds and real estate. For individuals with a disciplined savings and investment approach, the opportunity cost of a whole life insurance policy may be a consideration.
  
• Using the 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.¹

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 die. Later on, this type of policy starts to act more like whole life insurance, offering cash value that you can access while you’re alive.

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.

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.

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:

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.

Not sure if you have the right amount of life insurance? A simple rule of thumb is to multiply your annual income by the years until retirement. This is demonstrated by the example below.

Adding term life insurance to supplement your permanent policy is one potential way to bridge a coverage gap.

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 can be more complicated to manage this strategy compared to buying a single life insurance policy. You will have 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.

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.

Whether term or whole life insurance is better varies from person to person based on lifestyle, timeline, financial goals and strategy.

• When you’re young: Purchasing term life at a young age can protect your future insurability, plus you have the option of converting to permanent coverage when the time is right.

• When you need an affordable option for your growing family: If you and your family find finances tight, term life insurance can provide a large amount of coverage at a lower cost than whole life insurance. It can cover funeral costs and provide financial support for your family, from replacing your income and paying a mortgage to helping cover the costs of college for your children.

• While you’re starting a business: Term insurance is a cost-effective option for business owners who are focused on growing their business while protecting their families and business partners. Having the appropriate amount of life insurance can help ensure that your small business lives on—even if you are gone.

• When you are looking for investment-like cash value. If you want to maximize using the cash value of a policy for loans or withdrawing for income in retirement, whole life may be a good option for you.
  
• You want to leave a guaranteed death benefit to loved ones. As long as you pay premiums and don't have outstanding loans and withdrawals, your loved ones are guaranteed the death benefit amount that was agreed upon.
  
• You want an option that won't involve additional underwriting later in life. If you're worried about the ability to get insurance later on due to your family health history, consider whole life. Even if your health worsens, you’ll have insurance.
  
• You are interested in dividends. You want a contract that often pays dividends (though they are never guaranteed).

When you're thinking about your family's finances, ensuring that your income is protected now and in the future is essential. Life insurance can keep your family financially on track even after you're gone.

Ready to learn more about if term or whole life insurance is right for you? Connect with a financial advisor near you.