Term vs Whole Life Insurance: What’s the Best Option for You?

Life insurance is one of the most important types of insurance you can buy. But right now, about 37 percent of American adults don’t have any life insurance coverage.

Why do so many skip out on this important insurance coverage? Many say they can’t afford it. And some may just be confused. These policies have more ins and outs than your typical property insurance policy. And the benefits may seem fuzzier and further off.

But life insurance is an essential way to protect your loved ones in the event of your death. And once you understand the types of coverage that are available, it’s really not that confusing.

Let’s break down the two basic types of life insurance: term and whole life. We’ll explain the differences between them, and the different variations within those two categories. Then, we’ll talk about which type of coverage might be best for your needs.

Term Life Insurance: A Set Amount for a Set Number of Years

A basic term life insurance comes with a set amount of coverage for a fixed number of years. Basic term life insurance policies come with fixed monthly or annual payments.

For instance, I could purchase a 20-year, $100,000 term life insurance policy from Haven Life for about $15 per month. As long as I pay that $15 per month for the next 20 years, my family would receive a check for $100,000 if I died any time in the next 20 years.

After 20 years, the policy expires. If I’m still alive, the insurance company keeps my premiums, and the death benefit goes away. But I could choose to renew the policy for another set term if I choose.

Related: How Long Should Your Life Insurance Term Be?

This is how a basic level term policy works, but there are some variations on this theme. Here’s a breakdown of different types of term life insurance you might see:

Types of Term Life Insurance

Type of Insurance	Features
Level Term	Term is set when you take out the policy Terms range from five to 35 years, depending on the insurance company Premiums are guaranteed to stay the same for the life of the policy Death benefit stays the same throughout the term May include a renewable option that allows you to renew the policy after the term, as long as you medically qualify
Return of Premium Term	Usually includes level benefit and level monthly payment Allows for a return of your premiums, less fees and expenses, if you outlive the policy Will come with a higher monthly premium
Annual Renewable Term	Must be renewed each year Premiums can start out lower since the likelihood of death within one year is lower If you develop health problems within the year, you could be unable to renew or face much higher premiums
Decreasing Term	Available for a set term, but coverage amount decreases each year Premiums typically stay the same, but start lower because of the decreasing benefit Good option for covering specific expenses, such as mortgage debt or dependent care costs, that will decrease predictably over time
Increasing Term	Available for a set term, but coverage increases each year Premiums may stay the same, starting out higher, or increase annually Good option for younger people who don't need much coverage now but will when they own a home, have children, etc.
Modified Term	Customizable policies that may combine the features of the above types
Convertible Term	Policy can be converted to whole life insurance within a set term This may be available as an option for the above types of insurance

Type of Insurance	Features
Level Term	Term is set when you take out the policy Terms range from 5-35 years, depending on the insurance company Premiums are guaranteed to stay the same for the life of the policy Death benefit stays the same throughout the term May include a renewable option that allows you to renew the policy after the term, as long as you medically qualify
Return of Premium Term	Usually includes level benefit and level monthly payment Allows for a return of your premiums, less fees and expenses, if you outlive the policy Will come with a higher monthly premium
Annual Renewable Term	Must be renewed each year Premiums can start out lower since the likelihood of death within a year is lower However, if you develop health problems in that year, you could be unable to renew the policy or face much higher premiums
Decreasing Term Insurance	Available for a set term, but coverage amount decreases year by year Premiums typically stay the same, but start lower because of the decreasing benefit amount Good option for covering specific expenses, such as debts or dependent care costs, that will decrease over time
Increasing Term Insurance	Available for a set term, but coverage amount increases year by year Premiums may stay the same, starting out higher, or increase annually Good option for young people who may not need much coverage now but will need more later when they own a home, have children, etc. Can also help maintain the proper coverage with income increases over time
Modified Term	Customizable policies that may combine the features of the above types to get you the coverage yu need
Convertible Term	Policy can be converted to a whole life insurance policy within a set term This is available as an option for the above types of insurance

Whole Life Insurance: Death Benefits Plus Investments

Whole life insurance is actually a type of permanent life insurance.

This insurance doesn’t just have a death benefit. It also includes a savings component. This means you can maintain insurance for the rest of your life.

But it also means that premiums are more expensive, and these policies are more complicated.

Learn More: Should You Consider Permanent Life Insurance?

Each month when you pay your premium, part of the premium goes towards your straight-up guaranteed death benefit. The rest goes into an investment account, which the life insurance company invests on your behalf.

We’ll talk more in a minute about the pros and cons of this insurance approach. First, though, here are the different types of permanent life insurance you can buy:

Types of Permanent Life Insurance

Type of Insurance	Features
Whole Life	Includes a death benefit and a cash value Part of premiums go to an account on which the insurer pays dividends Investments and dividends make up cash value, which can grow or decrease annually You can withdraw some money from the cash value on some policies You can surrender the policy to get cash value, less fees, rather than the death benefit Some policies guarantee a minimum cash value level
Universal Life	Has both cash value and death benefit components Cash value may be tied to an annually adjusted interest rate Typically has a more aggressive and volatile investment strategy Doesn't guarantee a certain cash value You can pay more or less in premiums to vary the amount you invest Some policies allow you to pay premiums out of your accumulated cash value
Variable Life	Similar to universal life policies but with more investment options Cash value changes with the value of underlying investments, often including equities Policy can lapse if cash value is allowed to dip too low and premiums are to be paid out of cash value
Survivorship Life Insurance	Policy insures two lives at once and only pays out after both pass away Typically cheaper than two separate whole life policies Similar to whole life in other features

Type of Insurance	Features
Whole Life	Includes a death benefit and a cash value Part of your premiums go into an account on which the insurer pays dividends Investments and dividends make up the cash value, which typically grows each year You can withdraw some money from the cash value on certain policies You can surrender the policy to get the cash value (less fees) rather than the death benefit
Universal Life	Also has death benefit and cash value components Cash value may be tied to an interest rate that adjusts annually Typically has a more aggressive (and risky) investment strategy Doesn’t guarantee a certain cash value You can pay more or less in premiums to vary the amount you invest Some policies allow you to pay premiums out of your cash value
Variable Life	Similar to universal policies but with more investment options Cash value changes with the value of underlying investments, often including equities Policy can lapse if cash value dips too low
Survivorship Life Insurance	Policy insures two lives at once, and only pays out when both pass away Typically cheaper than two separate whole life policies Similar to whole life, except with two lives insured

Term vs. Whole Life Insurance: Which is Best for You?

Things get complicated when you add in all the types of each category of life insurance. But the main difference is this: term insurance is pure insurance, while permanent insurance is both insurance and an investment vehicle.

So, how does this play out in real life, and which option is best for your needs? Here’s what you need to know:

Term is Usually the Best Bet

Most people do need some form of life insurance coverage. Unless you are debt-free and have enough in savings to cover your end-of-life and funeral expenses, you need life insurance, even if you’re single with no children.

This type of insurance can keep your parents, other family members, or friends from bearing these costs should something happen to you unexpectedly.  You can use a term life insurance search engine like Quotacy to find the best term life insurance rates online.

Resource: How Much Life Insurance Do You Really Need?

Term is typically best for people who are married and/or have children, too.

Let’s say you’re just starting your family. You want life insurance coverage that will ease your family’s burden should something happen to you before your children are grown and on their own.

So, why is term best for these situations? Why not opt for a whole life policy that sticks with you permanently? There are two reasons:

1. Most people can self-insure in later years. Once you’re mostly debt-free and no longer financially responsible for children, you may not need life insurance any longer. A 20- to 30-year term will typically get you to this point. After this, you might carry just a small insurance policy to cover end-of-life and funeral expenses.
2. Whole life is significantly more expensive. The lifetime coverage makes the insurance piece of the puzzle riskier for insurers. So they up the premiums. Plus, this type of insurance has the additional burden of the investment portion of your premiums.

This isn’t to say there’s never a place for whole life or other types of permanent life insurance. While it’s not the best option for most people, in some situations it is beneficial.

Let’s say you have a child who will never be financially self-sufficient due to disability. You want to be sure your child is provided for when you die, whether that’s in ten years or 40. You could pick up a 30-year term policy.

But what if you get cancer and become uninsurable during that term? You may not be able to get either a whole life or a term life policy then. Or your new policy could become extremely expensive.

This is where whole life insurance comes in. Once it’s clear your child will need a death benefit, regardless of when you pass away, a whole life policy might be in order. It will ensure that you’re covered for life, even if you become ineligible for a new life insurance policy.

Related: The Complete Guide to Life Insurance

Some financial planners also recommend permanent life insurance to offset estate taxes for your beneficiaries. But this should be one part of a comprehensive estate plan.

Term vs. Whole Life Insurance: An Example

To flesh this out, let’s look at the possibilities with term vs. permanent life insurance policies.

We’ll look at situations for Sam, a 35-year-old man in Colorado. Sam has two kids and a wife, and wants to be able to cover their debts and replace some of his income if he passes away. So, he gets life insurance quotes for $500,000 policies from State Farm.

Sam’s kids will be grown by the time he’s 55, so he decides to get a quote for a 20-year term policy. It costs $35/month. For comparison’s sake, he also looks at a whole life policy, which will cost $589/month.

Here’s how things might look for Sam, financially, in three separate situations:

Situation 1: Death in 10 Years

If Sam were to pass away exactly 10 years after he takes out one of these policies, here’s how the term vs. whole life policy will play out:

Term: Under this policy Sam will have paid $4,200 in premiums for his term life insurance policy. His family will receive a $500,000 benefit. So the net benefit of this policy is $495,800.

Whole Life: Under this policy, Sam will have paid $70,680. According to the graphic below, which is a snapshot of the sample policy paperwork, Sam’s total death benefit will be between $522,456 and $545,107. Why the variability?

Remember, the value of the cash value portion of the policy depends on how well State Farm’s investments perform.

So, the net benefit of this policy after ten years should be between $451,776 and $474,427. That’s significantly less than the benefit provided by the term policy.

Resource: How Much Life Insurance Does a Stay-at-Home Parent Need?

Situation 2: Death in 19 Years

What if Sam almost outlives his term policy? Let’s see what it looks like then:

Term: Under this policy, Sam will have paid $7,980 in premiums. His death benefit will still be $500,000. So, the net benefit is $492,020.

Whole Life: By now, Sam will have paid $134,292 in premiums. The total death benefit plus cash value should be between $561,332 and $624,396, again depending on performance. The net benefit is between $427,040 and $490,104.

Once again, the term policy wins out.

Situation 3: Outliving the Term Policy

So, what happens if Sam actually outlives his term policy? It’s simple: after 20 years, his policy is up.

He can get a new one, possibly. But his rates will likely be higher. At this point, Sam will have paid a total of $8,400 without getting a penny in return.

With the whole life policy, though, Sam’s death benefit and cash value will continue to grow as long as he pays the premiums.

Learn More: 6 Big Expenses You Will No Longer Have In Retirement

If he’s ready to self-insure after 20 years, he could cash in his whole life policy for a guaranteed cash value of $120,485.

If the policy has performed well, maybe he can get $150,000 or $175,000 for the policy. So, he might actually break even — or possibly get some money beyond what he paid in premiums over the 20-year period.

Sounds pretty good, right?

But here’s a catch: if Sam invests the premium difference each month for twenty years, he’ll likely outperform the high-fee cash value portion of his whole life insurance policy.

Investing the Difference

Let’s see what it might look like if Sam outlives his 20-year term policy, but invests the $554 per month he’s saved in premiums.

Using this simple calculator’s “End Amount” function, we’ll have Sam start with $0 but invest $554 per month for 20 years. We’ll say his average rate of return is 6%, which is fairly conservative.

At the end of 20 years, his investments will be worth $251,205. That’s significantly more than the potential cash value of his whole life insurance policy!

This is why most people should purchase term life insurance instead of the wildly more expensive whole life insurance. Even if you don’t invest the full premium difference, you can likely out-earn a whole life policy’s cash value fairly easily.

Get a Quote: Looking for Life Insurance? Quotacy Can Help

What About Other Situations?

What if Sam has a 20-year term life insurance policy, but then an accident leaves one of his children wheelchair-bound?

He wants to be sure he can provide for this child for the rest of her life, no matter how long he lives. In this case, Sam could convert his term policy to a whole life policy, pay the higher premiums, and gain some peace of mind.

Again, there are other situations that might also call for a whole life insurance policy. If you’re concerned about taxes on a large estate, it’s worth discussing this type of policy with your financial planner.

Topics: Life Insurance

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