Should I Get Term or Whole Life Insurance?

If you're seeking affordable coverage for a specific period of up to 30 years, term life insurance is probably your best bet. On the other hand, if you're looking for lifelong protection with an investment component, whole life insurance may be a better fit for you.

Life insurance is essential for long-term financial planning and ensures your loved ones have monetary support when you die. Understanding the benefits and drawbacks of each type can shed light on which type is right for you.

On This Page

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  What Is the Difference Between Term and Whole Life Insurance?

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  What Is Term Life Insurance?

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  What Is Whole Life Insurance?

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  How Do I Choose Between Term and Whole Life Insurance?

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  Are There Alternatives to Term Life Insurance and Whole Life Insurance?

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  FAQs

What Is the Difference Between Term and Whole Life Insurance?

Term life insurance provides coverage for a specific period — typically 10, 20, or 30 years — and pays out a death benefit to the beneficiary if the policyholder dies during that period. Whole life insurance, in contrast, covers the policyholder for their entire life and pays out a death benefit regardless of when the policyholder dies (so long as premiums are paid).

Whole life insurance also has a cash value account that earns interest over time. This equity is can be withdrawn or borrowed against as a loan but must be repaid or it will be deducted from the death benefit. Due to these added benefits, whole life insurance policies are typically more expensive than their term life counterparts.

What Is Term Life Insurance?

Term life insurance is a type of life insurance that provides coverage for a specific period or “term.” Terms are usually available in 10, 20, or 30 years but sometimes terms as short as five years are available.^[1] The policy’s death benefit is paid out to the beneficiaries when the insured dies but only if the death is within the policy term.

Benefits

Term life insurance is generally cheaper than whole life insurance, making it a more affordable option for those on a budget. Additionally, term life insurance is easier to understand, with straightforward policies and no complicated investment components.

Different term lengths are available and this flexibility is useful if you have a specific financial obligation, such as a mortgage or a child's education, that you want to ensure is covered in the event of your death.

Potential Drawbacks

Term life coverage is temporary and that can be a drawback for some. Once the policy term ends, the coverage ends as well, and the policyholder will need to purchase a new policy to continue coverage — usually paying a higher rate to reflect the insured’s higher age and current health status.

Additionally, term life insurance policies do not build cash value, which means that there is no equity-building element component or benefits beyond the death benefit.

Average Costs

A 35-year-old healthy male who does not smoke can expect to pay around $40 per month for a 10-year term policy with a $250,000 death benefit. When calculating actual rates, life insurance companies will consider your age, health condition and the company’s financial strength, among other factors.

Below are sample rates by Aflac for a 10-year term policy with a $250,000 death benefit for a healthy individual.^[2]

What Is Whole Life Insurance?

Whole life insurance is a type of life insurance that provides coverage for the entirety of the policyholder's life so long as premiums are paid. Whole life insurance policies also come with a savings or investment component, known as "cash value," which builds equity over time.

Benefits

One of the major benefits of whole life insurance is that it builds cash value typically tax-deferred over time. A portion of your premiums is deposited usually in a savings account that accrues interest at a low but guaranteed fixed rate. This cash value can be borrowed against or withdrawn from, providing an additional source of funds if needed.

Additionally, the premiums for whole life insurance policies remain level for the entirety of the policy, providing consistency and predictability in budgeting.

Potential Drawbacks

One major drawback of whole life insurance is its higher cost. It is sometimes several times more expensive than term life insurance because of the cash value component and the guaranteed death benefit. Even if you secured a low rate because the policy was purchased when you were young, the lifetime cost of maintaining the policy can equal or outweigh the cost of an individual buying term life in their early 30s.

Another potential drawback is surrender charges. If you cancel your policy early, you may have to pay a fee. Outstanding loans can also reduce the death benefit if you don't repay them.

While accruing cash value is often touted as an advantage of whole life insurance, when you die, the insurance company may actually keep the cash value component of your policy. This means that your beneficiaries will only receive the death benefit and not the cash value — money that could have otherwise been put toward a retirement or general investing account.

Overall, whole life insurance is also more complicated than term life insurance so it may take more time and effort to understand.

Average Costs

The average cost for a whole life policy with a $250,000 death benefit for a healthy 35-year old male is $273.56 per month.^[3] Using the earlier chart for term life rates as a comparison, the same 35-year old male pays over five times more for whole life than term life insurance.

However, keep in mind that the term life rates were for only a 10-year term so you will likely see higher rates for terms of 20 or 30 years.

How Do I Choose Between Term and Whole Life Insurance?

Choosing whole life versus term life insurance depends on several factors including your age, health, financial situation, and long-term goals.

Who Is Term Life Insurance Best For?

Term life insurance is an excellent choice for those with a family and a mortgage. You can choose a term that matches however many years are left on your mortgage. That way, if you die, your spouse isn’t saddled with making loan payments alone — which can be challenging for a single-income household. If the death benefit is large enough, it may even pay down the mortgage entirely.

Term life insurance is also ideal for those who have temporary needs for insurance coverage. For example, you may only want coverage that lasts until you retire. Once you reach retirement age, you can rely on your savings, retirement account and social security (if you qualify) to survive. If you die before then, then your family can use the life insurance proceeds to pay debts, daily living costs and other expenses.

Who Is Whole Life Insurance Best For?

Whole life insurance is an excellent choice for those who want permanent life insurance coverage with an investment component. The cash value typically grows in a low-risk savings account at a slow but steady and tax-deferred rate. A whole life policy may also be a good choice for those who want to borrow against or withdraw from the accrued equity in their later years.

Is Term Life or Whole Life Better?

Whether term life insurance or whole life insurance is better depends on your needs and goals.

Term life insurance is generally cheaper and offers more flexibility, while whole life insurance provides lifelong protection with a cash value component.

If you need coverage for a specific period and want to keep costs low, term life insurance is probably the better choice. However, if you want permanent coverage with an investment component and don't mind paying higher rates, then whole life insurance would better suit your needs.

Are There Alternatives to Term Life Insurance and Whole Life Insurance?

There are no alternatives that offer temporary coverage like term life but other options for permanent coverage are available. Other types of life insurance policies with lifelong coverage are available and can offer greater flexibility in your death benefit and control over your cash value account.

• Universal life: Those who hold a universal life policy can adjust their death benefits up or down and use the cash value they have accumulated to pay for premiums. The cash value of the policy, like a whole life policy, earns interest at a declared rate.
• Variable life: Unlike a savings account, variable life operates more like an investment vehicle that allows policyholders to select the stocks and bonds in which they want to invest. The growth potential of a variable life policy is higher than that of a whole life policy since a thriving market can result in a greater rate of return. The trade-off: policyholders are at risk of losing money if their investments do not perform well.
• Indexed universal life: These policies function similarly to a variable life policy except the rate of return is typically tied to the performance of a specific stock market index such as the S&P 500 index.