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Term Vs. Whole Life Insurance: What’s The Difference?

Da'Vonne Duncan5-Minute Read
November 11, 2021

Most people understand the concept of life insurance: when you pass, your beneficiaries receive a large sum of money depending on the policy you have. However, some may not be able to describe the advantages and distinctions between whole life insurance and term life insurance. So, if you’re confused about the differences, you’re not alone. Identifying the nuts and bolts of these two options may be helpful to you, especially if you want to secure your family’s financial future. We’ll dig in and learn more about the pros and cons of term life and whole life insurance.

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What Is Term Life Insurance Vs. Whole Life?

Understand that term life and whole life are two different life insurance policies. The difference between the two comes down to cost and length. A term life insurance policy is less expensive because you’re covered for a period of time and your beneficiaries will receive a payout if you die before the term ends. Unlike term life, whole life insurance is a more expensive, complex product since it contains an investment account and lasts your entire life. In 2016, the Insurance Information Institute discovered 4.3 million people purchased term life insurance, while 6.4 million held whole life insurance.

Whichever policy you choose, your family will have access to the death benefit, also known as the payout, which is nontaxable and can cover an array of expenses such as college tuition, mortgage payments, funeral cost and more. Based on the kind of coverage you need, one life insurance policy may be more beneficial than the other.

Term Life Insurance

A term life insurance policy, also known as pure life insurance, guarantees that the insurer will pay the face value of the death benefit if the insured person dies during the preset period. Since term life insurance has limited coverage, the policy lasts for a fixed period, usually 1 – 30 years. Keep in mind, if the policy happens to expire before your death, there will be no payout, but you’ll have several options. You could choose to terminate the policy, convert your term life insurance into a permanent policy or renew your policy. If you decide to renew your term life policy, the insurer will have to recalculate the premium and the payout amount according to your age at the time you renew.

Types Of Term Life Insurance  

When researching term life insurance, you’ll find that there are two main types: level and decreasing. While level term life insurance tends to be more popular, it’s important to consider which policy will best fit your financial obligations.

Level Term Life Insurance

This type of term life insurance offers premiums that are the same amount throughout the policy length. When people discuss term life insurance, they’re often referring to level.

Decreased Term Life Insurance

These policies have a declining payout each year, based on a predetermined schedule. Despite the reduced death benefit, the policyholder will pay a fixed premium for the length of the term. This means your loved ones will not collect a large sum of money if you died later in your term. For instance, let’s say you died in year 25 of your term, your family would receive less of the face value. But if you passed during year 3 of your term, your beneficiary would receive a greater amount. This type of policy would be best for someone who expects their expenses to dwindle.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that offers a tax-deferred cash value and ensures the death benefit will be paid out. Since this kind of policy holds out your entire life, it’s more expensive than term life. Despite being expensive, the premiums remain the same over the policy and a portion of the premium is transferred to an investment account that grows over time on a nontaxable basis. This means you won’t pay taxes on the gains.

Term Vs. Whole Life Insurance Pros And Cons

There are advantages and disadvantages when it comes to both term life insurance and whole life insurance. Let’s weigh what your beneficiaries could be facing on both policies.

Term Life Insurance Advantages And Disadvantages

Term life insurance is less expensive and has a high death benefit for your beneficiaries, but before you buy a term life insurance policy consider the setbacks and rewards.

Advantages

Disadvantages

  • Only available for the term
  • Can’t use to save on taxes
  • Premium may increase over time

Whole Life Insurance Advantages And Disadvantages

Whole life insurance offers more benefits compared to term life insurance, but it still has a few downsides that you may want to investigate. Besides being the more expensive product, insured people will have access to an investment account and be covered for life. Reflect on both the pros and cons before you decide to purchase.

Advantages

  • Lock in premiums for life of policy
  • Pay the same monthly rate
  • Cash value accumulates in investment account

Disadvantages

  • More expensive than term life insurance
  • Outstanding loans will reduce the death benefit
  • Takes a long time to build cash value

Term Life Insurance Vs. Whole Life FAQs

Here you’ll find answers to the frequently asked questions regarding term life and whole life insurance.

How much will each policy cost?

Various factors are going to determine the cost of your life insurance such as age, gender, smoking status and possibly your family medical history. Please be advised that whole life insurance comes with higher premiums due to the added investment account, along with coverage for your entire life. So, if you’re looking for something more temporary and less expensive, consider term life insurance if you would like to be insured until you can afford permanent life insurance.

Here’s how annual premiums compare for a $100,000 policy for term life insurance and whole life insurance. The monthly estimate for a 30-year policy length for a female, who is exceptionally healthy will be approximately $9.82 for a term life insurance policy. But the whole life insurance policy was slightly higher at roughly $10 a month for a 30-year $100,000 permanent life insurance policy. Again, rates will vary depending on your background and the length of your policy.

Should I convert my term life policy to whole life?

If your life situation changes, most term life insurance policies can be converted to a whole life insurance policy. When you change from short-term insurance to whole life, you will begin the process of growing a nontaxable cash account and there are several things you can do with it. You have the option to withdraw the cash value or take out a cash value loan against the policy.

There are several reasons why people want to convert their policy. For example, you may have a child with special needs, which would make them a life-long dependent. Or maybe you always wanted a lifetime policy but could only afford the lower premium costs of term life insurance. When considering converting your life insurance, be sure to factor in your other financial obligations to ensure you can make the higher payment.

The Bottom Line: Choosing Term Life Insurance Vs. Whole Life Insurance Depends On The Person

Once you recognize the differences between term life insurance and whole life insurance, it’ll be easier to comprehend how each policy can benefit you and your family. Whether your health is declining rapidly, or you need a temporary policy until you can afford a permanent one, term life insurance can ensure your family will be able to pay financial responsibilities. Or if you’re looking to build a cash value account and prefer a long-term solution, consider purchasing a whole life insurance policy. Everyone's needs are different, so think about what yours will consist of. Read our other Rocket HQSM personal finances articles for more resources that’ll help you think through other financial decisions.

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    Da'Vonne Duncan

    Da’Vonne Duncan is a Blog Writing Intern, covering lifestyle topics for the Publishing House. She has a passion for words and enjoys writing scripts, blogs, narratives, and poetry. She holds a bachelor’s degree in Mass Communications with a concentration in digital video production, from Delaware State University.