The bottom line:
This article covers:
The difference between term & whole life insurance The pros of term life insurance The cons of term life insurance The pros of whole life insurance The cons of whole life insurance Which is better: Term or whole life insurance? Term vs. whole life: A cost comparison Why is whole life insurance often more expensive than term? Can you convert your term life insurance into whole life insurance? When should you buy both term & whole life insurance? What is blended life insurance?
What’s the difference between term & whole life insurance?
The main difference between term and whole life insurance is that term life is temporary, while whole life is permanent.
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.
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.
- Affordability. Term life insurance is generally more affordable than permanent life insurance. This is because 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.
- You can 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 loved ones 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.
- 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. You can learn about conversions in our article
how a term to permanent life insurance conversion works.
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. 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 a permanent policy like whole life insurance, there is no
cash valuewhen 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 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.
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.
It has a 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.
Whole life insurance 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
There may be tax advantages & potential dividends.
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.
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.
What are the cons of whole life insurance?
The main disadvantage is generally higher premium payments that can be ongoing.
It generally has a higher cost than term life insurance
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.
You need to keep up with recurring payments
Ongoing premium payments2 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 & tax implications
It may have a lower growth rate than other types of 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.
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.
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.
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
When should you buy both term & 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
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.
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.
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