The Difference Between Term and Whole Life Insurance


When looking to get a life insurance policy there are generally two options, term and whole life insurance. The most basic difference between the two is the amount of time you are covered for with these policies. A term life insurance policy covers you only for a portion of your life, usually somewhere within ten to thirty years from the time you open the policy. As for the whole life policy it would be permanent, covering you for your whole life.

The differences do not end here however, the components of a whole life policy and term life policy are different. Breaking these two types of policies down will help us to understand their differences.

What is a Term Life Insurance Policy?

A term life insurance policy is an insurance policy that is meant to cover you temporarily in the event that you die while being the main household provider. This kind of coverage typically lasts for ten, twenty, or thirty years and is intended to end at around the time your need for life insurance has passed. Ideally at the end of your policy you will have a good amount of savings, paid off your house, and have financially independent children. When choosing a term life policy make sure to choose one that covers the bills for your family and provide them with whatever funding they might need, such as childcare, emergencies, and housing.

What is a Whole Life Insurance Policy?

A whole life insurance policy is a bit more complicated than a term life insurance policy. Where the term life is temporary the whole life policy is permanent and lasts until you die. A whole life insurance policy, just like a term life policy has a death benefit, that your chosen beneficiary will receive in the event of your death. In addition, a whole life policy also has a cash value component. Each premium payment, whether it’s monthly or annually, goes in part to both the insurance company and to the cash value. This cash value part of the policy works like a small investment, earning interest and accruing value over time. It’s not as strong as say a Roth IRA, but it certainly keeps your money safe. Policyholders can eventually dip into this cash or take loans out to help pay for things like retirement. This fund can only be used during the policyholder’s lifetime and does not pass on to the beneficiary.

The main downside to this kind of policy is that it is much more expensive than a term life policy. Because of the cash value policy as well as few other factors associated with a whole life policy the premiums for a whole life policy are typically five to ten times higher than the term life policy.

Which Choice is Right for You?

There are a few key factors that go into choosing between a whole life insurance policy and a term life, the biggest of which is what you need out of a life insurance policy. Term life insurance policies are for people who need coverage over a specific time, such as the years you will be paying off a mortgage or raising your children. Term life is also for people who might want the most affordable option, be it because you think you can invest your money more profitably elsewhere, or want a permanent insurance policy, but simply cannot afford it. In the case of the latter, some term life policies can be turned into whole life policies, but the deadline and process vary from policy to policy. If this is something you are interested in, make sure to ask your insurance agent when opening your policy.

Whole life insurance policies are for people who want to make sure their heirs can cover any sort of expenses that may arise after their passing. If you want to spend our retirement fund and still want to leave an inheritance for your children or simply cover funeral fees a whole life policy would be a good way to do that. Also, if you have a business that you are leaving to one child and want a balanced inheritance a whole life policy would be a way to compensate multiple children. A whole life policy is also a great option for someone with lifelong dependents such as special needs children. If this is the case consult a lawyer about setting up a trust that would be funded by your life insurance policy.

If you end up choosing a whole life policy and later on get to the point where you either no longer need it or can no longer afford the premiums you could then consider a life settlement, which would give you the opportunity to acquire some of the value before you die. You can read more about the life settlement option here.

whole life and term life insurance

Other Types of Policies

If you are curious about the differences between term and whole life insurance policies, you might also be interested in some other options such as universal life insurance or variable life insurance policies. Universal life insurance pays interest based on market rates, such as the mortgage interest rates and the like. Variable or variable universal life insurance allows access to direct investments in the stock market. Also available is the indexed universal life insurance which pays interest based on stock market indexes. Some of these options may also be cheaper than whole life insurance policies while also offering more in terms of investment opportunities.

The main drawback to a life settlement is that while it is a simple process it takes time to receive the benefit. A typical life settlement process takes 90 to 120 days from application to receiving the benefit, however if you can afford to wait and if you qualify this is the most lucrative option available. If you are interested in estimating the value, you would receive from a life settlement you can try our estimator here.

 If you are looking to cash out your life insurance policy remember that you have options. If you cannot wait because of financial obligations or some other reason you should try to withdraw or borrow cash from the policy rather than outright surrendering the policy or allowing it to lapse. If you can make it three to four months you should seek to receive a life settlement.