Choosing between term and whole life insurance is the first big decision when you buy life insurance. Both pay a death benefit to your beneficiaries, but they work very differently and can cost very different amounts.
How term life insurance works
Term life covers you for a fixed period, commonly 10, 20 or 30 years. If you die during the term, your beneficiaries receive the death benefit. If you outlive the term, the coverage ends. Premiums are usually level for the whole term.
Advantages: much lower premiums for the same coverage amount, simple to understand, and easy to match to a need such as a mortgage or raising children.
Disadvantages: no cash value, and renewing or buying a new policy later can be expensive or difficult if your health changes.
How whole life insurance works
Whole life is permanent insurance that lasts your entire life as long as premiums are paid. Part of each premium builds cash value at a guaranteed rate, which you can borrow against or withdraw. Some policies also pay dividends.
Advantages: lifelong coverage, fixed premiums and guaranteed cash value growth.
Disadvantages: premiums are typically many times higher than term premiums for the same death benefit, and cash value grows slowly in the early years. Surrendering a policy early can mean losing money.
Side-by-side comparison
| Term life | Whole life | |
|---|---|---|
| Length of coverage | Fixed term | Lifetime |
| Cost | Lower | Much higher |
| Cash value | None | Yes, guaranteed growth |
| Best for | Income replacement, mortgages, young families | Lifelong needs, estate planning, dependents with special needs |
Who should choose term life
Most families who need to replace income while children are young or a mortgage is being paid off are well served by term life. A popular strategy is to buy term and invest the difference in premiums in retirement accounts.
Who might consider whole life
Whole life can make sense for people who need coverage that never expires, such as for estate planning, a lifelong dependent or business succession, and who have already maximized other savings options.
Next step
Estimate how much coverage you need, then compare quotes for both types. Our life insurance guide explains how to calculate the right amount.
This article is for general information only and is not insurance, legal or financial advice. Rules and prices vary by state and insurer. Check your policy and talk to a licensed agent before making changes.
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