Term vs. whole life insurance: Pros, cons & when you may want both

You can’t predict what might happen down the road, but you can take steps to secure financial protection for your loved ones if something happens to you. Life insurance helps you do that.
Two of the most common types of coverage are term life and whole life insurance. Term life insurance provides coverage for a set period while whole life insurance offers coverage for your entire lifetime. 

Understanding the differences between term and whole life insurance can help you choose the right policy for your financial goals and protection needs.

Both term and whole life provide a death benefit, with the main difference being how long your coverage lasts. Term life insurance ends after a limited period, usually between 10 and 30 years, as long as premiums are paid. Whole life insurance can offer protection throughout your lifetime. 

Term life is generally more affordable, while whole life costs more because it offers lifelong coverage, cash value growth, and additional features.

Here's a rundown of the key differences:

Term life insurance is temporary coverage that provides your loved one(s) with a payout called a death benefit if you pass away while the policy is active. The terms usually last 10, 15, 20 or 30 years. It’s straightforward, with no cash value or investment component.

Term life insurance is typically the most affordable option, making it ideal for short-term financial protection during key life stages like raising children or paying off a mortgage. You can lock in premiums so they won’t change for the duration of the contract. As long as you pay the premiums, your coverage stays active during the term.

After you pass away, the death benefit—the amount of money your beneficiaries receive from the insurance company—is paid out. They can use these funds to cover housing costs, educational needs, debt or other daily living expenses.

Whole life insurance provides lifelong coverage with a guaranteed death benefit and the potential to build cash value for future financial needs. It can also have options like cash value growth and dividends that increase the value of the contract over time.

• Cash value. When you pay your premiums, a portion of them is set aside. These funds can be invested and grow tax-deferred, helping you build cash value. After a certain time, you can withdraw or borrow from this cash value for a variety of needs, such as to cover expenses or supplement your retirement income. (Be aware, though, that using your cash value without repayment means it won't be part of the death benefit.)
• Dividends. Some life insurance products offer dividends. It's money the life insurance company distributes if it performs better than expected in a year. Depending on the options your like insurance company offers, you might be able to choose to use those funds to lower your premiums, take a payout or reinvest them to increase your death benefit or cash value.

As with term life insurance, the death benefit is paid to your beneficiaries after you pass away, and they can use the money for any purpose.

Deciding whether term or whole life insurance is better depends on your needs. Term life provides affordable coverage for a specified time while whole life can offer lifelong protection with more options for your investment at a higher cost.

You'll need to look at how each can help you now and in the future. Here are some of the pros and cons of term and whole life insurance to consider:

Term life insurance is more affordable and often simpler to manage than whole life. If you have a tight budget, term life can be an accessible coverage option that offers comfort without a large monthly investment

• Cost of coverage. Premiums are generally lower than whole life because coverage for a death benefit payout lasts only for a set period.
• Flexibility. You can choose a coverage period that fits your needs and budget. This flexibility lets you only pay for protection while you need it, such as until your mortgage is paid or your children are no longer dependent on you as a provider.
• Simplicity. Term life gives you financial protection in the form of a death benefit that pays out when you pass away. There’s no cash value or other investment features to manage.
• Riders. Some term contracts allow you to add or remove riders as your circumstances change. Common riders include a premium waiver in case of disability and accelerated death benefit for terminal illness.

Term life insurance has no investment component, just a payout upon death. The limited contract length can also be a risk. If you develop a health issue later but don't have permanent coverage in place, you may have trouble qualifying for affordable insurance again after your term life contract ends.

• Temporary coverage. Coverage ends when the term expires unless you renew or convert to a permanent policy. If you need insurance later, costs may be higher.
• Increasing premiums. Premiums can increase substantially if you renew after the initial term. Renewal rates depend on your age and health at that time.
• No cash value. This type of life insurance contract doesn’t have a cash value component for potential growth or emergency needs.
• Usually no dividends. Some specialized contracts may offer dividends, but term life insurance holders are normally excluded from insurer profit-sharing.

Whole life can be a "set it and forget it" option. As long as your contract is in force, you have coverage for the duration of your life. The cash value component can also be appealing if you want to use life insurance as an investment.

• Guaranteed protection. Coverage with whole life insurance is a long-term plan as long as you fulfill the payment and other contract requirements. With ongoing permanent coverage, you won't have to reapply and face premium hikes based on age or health. You also don't have to worry about outliving your contract.
• Cash value. Contracts can build cash value that grows tax-deferred. You can borrow or withdraw from it for emergencies, retirement or other needs. (Loans and withdrawals may reduce the value of the death benefit.)
• Riders. Whole life often has more options for add-ons than term life. You may, for example, want to consider a long-term care rider, if offered, for even more financial protection throughout your life.

Dividends. Some whole life policies pay dividends, which can increase your contract’s value or reduce future premiums. However, these aren’t guaranteed and depend on the company's performance.

Whole life insurance offers stability but comes at a higher cost, and your payout can decrease if you withdraw from the cash value. It's a more complex product and can demand more attention to maximize the features.

• Higher cost. Whole life premiums are generally more expensive than term life. You pay for lifelong coverage and extra features that term policies don’t include.
• Value considerations. Investing in a whole life contract might not fit your budget if you need a high amount of coverage for only a limited time. It's best to first determine how much life insurance coverage you need before you decide what kind and features you want.
• Limited flexibility. Whole life may offer extra features, but you’re also committing for the long haul. If you later want to reduce your coverage or premiums—or cancel the policy entirely—you may face added costs, surrender charges or other penalties.
• Potential for reduced payout. Taking loans or withdrawals from the cash value without repaying them will reduce the amount your beneficiaries receive beyond the basic death benefit. 

Blended life insurance combines features of term and whole life, offering affordable coverage now with the ability to build cash value and secure lifelong protection later. It has some of the lifetime protection and cash value growth of whole life but is still a limited term contract that often has lower premiums.

For example, someone in their 30s might choose a blended contract to secure enough coverage for their mortgage and young family now while gradually building protection for the future. Over time, the contract transitions into whole life coverage, building cash value and ensuring lifelong protection as long as premiums are paid.

Blended life insurance is for those seeking some long-term security but can’t afford or don’t need a traditional whole life contract. It can serve as a middle ground for families whose financial needs and budget are expected to change over time.

If your term life insurance comes with a conversion option, you may be able to change it into whole life insurance at the end of the term. During conversion, some (or all) of the death benefits are used to open the whole life insurance contract. Expect higher premium payments after you convert the contract.

Most insurers allow you to convert during the original term or before reaching a certain age, often around 65. People often choose to convert when they want lifelong protection or if their health has changed, making it more difficult or costly to purchase a new permanent contract.

Begin by contacting your insurer, then select the coverage amount you want to convert and complete a new contract.

Sometimes the best life insurance coverage for you isn't one or the other but a mix of term and whole. Combining term and whole life insurance can provide flexible and affordable coverage that adapts as your financial needs change. It's a matter of balancing short-term protection and lifelong security.

Here are a couple of scenarios where this approach may make sense:

Your life insurance needs often change as your financial situation evolves. For example, you may have purchased a whole life contract several years ago when your income and financial obligations were smaller. Now, with a mortgage, kids and bigger financial goals, adding a term life contract can temporarily boost your coverage during these years at a much lower cost than buying more whole life.

This combination offers the best of both worlds. You get affordable protection now and guaranteed lifelong coverage later. The term contract helps replace income, pay off debts or fund college if you pass unexpectedly, while the whole life portion ensures your family still gets a death benefit for final expenses or inheritance needs after the term expires.

A ladder strategy involves owning multiple life insurance contracts with different term lengths to align with specific financial milestones. For example, you might buy 10-, 20- and 30-year term contracts that expire as major expenses like childcare, tuition or a mortgage are paid off. This approach can help lower your overall costs while ensuring you have the right amount of term coverage at different stages of life.

In this approach, you would have a whole life contract as your permanent base layer. After your term contracts expire over time, the whole life coverage continues to provide a guaranteed death benefit for final expenses or other financial needs.

When planning for your family’s long-term financial security, it’s essential to protect your income today and ensure coverage for future needs like retirement and estate planning. Choosing the right life insurance involves evaluating your financial goals, risk tolerance and how your needs might change over time. 

Whether you select term, whole life or a combination, the best choice depends on your needs, risk tolerance and long-term financial goals. A Thrivent financial advisor can help you weigh the options and decide what kind of coverage and benefit amount makes sense in your overall financial plan.