The Basics of Term vs Whole Life Insurance Explained

Life insurance is a commonly used insurance product that, in its basic form, provides a payout to the policyholder’s survivors (the beneficiaries) if the policyholder dies.

That description barely scratches the surface of all the options that can come with life insurance, however. There are two main types of life insurance, whole life insurance and term life insurance.

Additionally, there are several riders and policy changes that can extend coverage, change premiums, and make other policy alterations related to other events, such as disabling accidents, chronic illnesses, and more.

In this guide, we review whole life insurance vs term life insurance, offering descriptions of both and a comparison of the two policy types. Making a decision about life insurance is a key part of holistic retirement planning and important for many families, so it can only help to be informed about the options.

The Basics: Term Life Insurance vs Whole Life Insurance

Term Life Insurance

Term life insurance stands out because it covers a specific amount of time, or term, before coverage ends.

The Cornell Legal Information Institute explains that term policies typically only provide a death benefit, and therefore not a benefit for disability or chronic illness, for example. A death benefit is paid when the policyholder passes away in a manner covered by the contract. The named beneficiary or beneficiaries then receive the death benefit specified in the contract.

The death benefit could be a fixed amount that is paid whenever a qualifying event (i.e., the covered death of the policyholder) occurs. Alternatively, the amount of the benefit paid may change depending on when the policyholder dies and the length of the policy.

Term policies offered by life insurance companies are often flexible in their initial terms and conditions. The policy may be purchased for different lengths of time, with common examples including 10 years, 15 years, and 20 years. At the end of the term, there are often options to extend it or convert the policy to another form of insurance.

The initial premium payments depend on various factors, such as age, health, and other calculations made by the provider. Policies often include premiums that increase over time, as the likelihood of the policyholder’s death increases with age.

Premiums are lower with term life insurance as compared to whole life insurance because of the more limited nature of coverage. That makes term life a potentially useful choice when budgets are limited and the higher premiums of whole life insurance are less affordable.

Term life insurance policies can also be effective when there are specific financial needs in play. For example, a family with young children may choose a term policy that will cover the expense of raising the children and sending them to college. Their financial needs will likely reduce over time as the children finish their education, become adults, and start careers of their own.

Whole Life Insurance

Whole life insurance can also be thought of as permanent life insurance because it provides lifetime coverage as long as premiums are paid. The beneficiary or beneficiaries will receive the described payout when the policyholder dies in a way that is covered by the policy. There is no term end or other stopping point for coverage as long as the policy is in good standing.

Crucially, whole life insurance includes an equity component – a cash value that grows over time and can be tapped into for other important financial needs as a loan. These policies can pay dividends that can be kept as cash, used to reduce premiums, or kept in the policy to accumulate interest.

Premiums for whole life policies are normally fixed, making them predictable in the long term. This is because the accumulated premiums reduce the direct financial uncertainty to the insurer in terms of providing a payout. However, as Investopedia explains, the premiums are also generally higher than those of term life policies.

Term Insurance vs Whole Life Insurance

While both are types of life insurance and therefore have many similarities, there are also key differences between insurance with whole life vs term life. Here’s a whole vs term life insurance comparison to make those distinctions a little bit clearer.

Similarities: Term and Whole Life Insurance

Both types of life insurance have the following in common:

• They provide a death benefit for the policyholder, paid to the beneficiary.
• They both cover relatively long periods, although the specific length of coverage is a key difference between the two.
• The premiums take age, health, and other individual factors into account.
• Both require premiums to be paid regularly and in full to maintain coverage.
• Both generally, although not universally, provide a tax-free payout to beneficiaries.

Differences: Term and Whole Life Insurance

Key differences between these different types of life insurance include:

• Whole life coverage continues as long as premiums are paid; term life only covers a specific period of time (although the policy may be extended or converted to another form of insurance in some cases).
• Whole life coverage has higher, fixed premiums while term life coverage has lower, variable premiums.
• Whole life coverage builds equity over time that can be used for a variety of purposes; term life coverage does not include an equity component.
• Term life coverage is more flexible in terms of providing coverage related to time-specific needs, like having a backup plan in place to pay for a child’s college education. Whole life policies are less flexible in that they continue until the policyholder dies.
• The payout of a term life policy is fixed, while the payout of a whole life policy can change if a loan against the policy’s equity is active when the policyholder dies.

Finding the Right Life Insurance for Your Needs

Choosing the right type of life insurance and a specific policy can be easier with the support and guidance of a qualified financial advisor. As part of the broader financial planning process, an experienced and knowledgeable advisor can help you find a policy that makes sense for your specific needs and goals.

Our team is here to help you create a plan for achieving your financial goals.