Term vs. Whole Life Insurance: The Differences and Which One to Choose

Written By
Julija A.
July 06,2023

A lot of people don’t know anything more about life insurance except that their families can get a certain amount of money if they die. Even if they heard about the most common variants, term and whole life, they can’t tell you much in the way of details.  

If you’re among the many Americans grappling with the term vs whole life insurance comparison, here’s what you need to know. Whole life insurance is more permanent and offers lifelong coverage, while term life insurance lasts for a set number of years. Of course, these are just the basics, and the differences between term and whole life insurance are a little more complex. Keep reading to find out exactly how these two types of insurance work and which one is the best option for you. 

Differences Between Term and Whole Life insurance

Term life is a less complicated type of insurance offered by many life insurance companies. As the name implies, policyholders are covered for a set period of time. It can be between five and 30 years, depending on the insurance provider. It’s one of the most popular life insurance options, mostly because it comes with affordable premiums. However, this insurance eventually expires, and it can only be charged if a policyholder passes away while the coverage is still in force. 

Whole life insurance is also popular, but it’s a more complex option. This is more than just insurance coverage; it’s a type of investment. Universal whole life insurance works as long as you pay premiums, and it includes a cash value component. Of course, it’s much more expensive than term life insurance. 

Whole life and term life insurances guarantee you payouts or death benefits. Death benefits are paid to your beneficiaries (children, grandchildren, spouse, etc.), and they are tax-free. When it comes to premiums that you pay, both whole and term life have constant premiums that won’t change over time.  

What Is Term Life Insurance?

Term life insurance, also referred to as “pure” insurance, is coverage that protects beneficiaries in case a policyholder dies prematurely. So, how does term life insurance work exactly? 

Term life insurance coverage is straightforward and easy to understand. Basically, you buy a policy that has a time limit. You can choose how many years you want to be covered. For example, it can be five, 10, 20, or 30 years, depending on your agreement with the insurance provider. After that time has passed, the policy simply expires, and your contract with the insurer is over. 

Term insurance often offers little more than peace of mind and is usually purchased by parents who want to provide their children with financial security in case of premature death. 

Still, when choosing between term or whole life insurance, many young people opt for the former option. That’s because it’s more affordable and still provides a degree of protection. When it comes to families with a mortgage, the breadwinner will often go with term life insurance for a number of reasons. The policy can be used to cover mortgage payments and other costs such as college tuition fees and even the funeral. In some cases, the death benefits can cover the entire amount you owe to the bank, shielding your children from future debt. 

Due to these versatile benefits of term life insurance, many policyholders choose to make payments as long as their children are young and can’t take care of themselves. In other words, this is the ideal solution for individuals who have financial responsibilities for a limited number of years. For example, a 30-year-old woman can get a policy for 20 years with a $500,000 death benefit that will cost approximately $21 per month.

The Disadvantages of Term Life Insurance 

For most people, the monthly rates are the deciding factor when they’re weighing their options and making the whole life vs term life insurance comparison. However, the rate depends on many factors. For example, if you choose a term policy that offers sizable death benefits, the cost will naturally go up. Also, you’ll need to undergo medical tests before purchasing the policy, and any health problems will drive up the rates. But perhaps more importantly, term life insurance isn’t considered a long-term investment that can be used to grow your wealth or help you save on taxes.    

What Is Whole Life Insurance?

Whole life insurance or permanent life insurance is a type of coverage that lasts as long as you pay premiums. Just like term life insurance, whole life has a death benefit component, but it also builds your cash value, which increases over time. This is why whole life insurance is considered a blend of insurance and investment.  

Namely, whole life insurance can provide an additional source of income for you or your dependents that you can use in case of emergencies. When paying for a whole life policy, a portion of your payments go to the insurance, and the other part is allocated for building cash value. Growing on a tax-deferred basis, these are funds that you can tap into during the course of your lifetime. 

Obviously, permanent whole life insurance is exactly that - permanent. It lasts your entire life if you pay premiums regularly. The rate you pay is usually guaranteed, but some whole life insurance providers offer participating policies or policies that can increase your returns. 

Aside from the aforementioned death benefits, you can make direct withdrawals from the cash value amount or request a loan. The rate you pay for a loan varies from provider to provider. Of course, any withdrawal or loan that is unpaid reduces the cash value of the policy. 

A whole term life insurance policy is often purchased by people who want to have a savings account. Generally, it’s the safest way to protect your children if something happens to you and save some money for retirement. Depending on how long you pay for premiums, the cash value will accumulate over time, and at some point, you can start drawing money from it.  You can use the money to pay for your children’s college, repair your home, or pay medical bills. 

The Disadvantages of Whole Life Insurance

Some people stay clear of whole life insurance because of its complexity. They find term policies simpler since they are time-limited. But one of the most notable downsides of this permanent option is the price tag. According to some estimates, whole life policies cost between five and 15 times more than term policies. This is why many consumers eventually give up on whole life policies. And to make matters worse, some providers charge additional fees in case you decide to leave them.

Term Life Insurance vs. Whole Life Insurance - Which One Should You Choose?

Now that you’re familiar with the main components of these two insurance variants, the next question is which life insurance is the best option? The question doesn’t have a straightforward answer, and it depends on your individual needs. Both whole life and term insurance guarantee that your beneficiaries will get death benefits in case you pass away. With whole life insurance, you’ll get the opportunity to grow your wealth as it comes with a cash value component, but you’ll need to pay more for this policy.  

So, how do you decide which one is better for you? Here’s a short list of key components with both types of insurance options.

Term Life Insurance Coverage

  • Suitable for people who want to provide beneficiaries with financial security for a certain period of time (until children grow up and start earning their own money)
  • An affordable form of insurance that has an end date
  • The time-limited structure can make policyholders feel like they’re wasting money. Regardless of the terms of your policy, it will expire eventually. 

Whole Life Insurance Coverage 

  • Death benefits serve as a source of funds for the future needs of beneficiaries. 
  • Cash value component that provides an additional source of income.
  • Good option for those who want to have tax-free savings 
  • The cost of whole life insurance is high, and this is a more complex option than term life. 

The type of insurance you choose for you and your family depends on many factors. But ultimately, whatever you choose, the coverage offers certain benefits and a peace of mind that’s better than no protection at all.


Which policy is better - whole life or term?


Before purchasing a life insurance policy, consider both options carefully and see which one fits you best. Each person has individual needs and financial situations that are often the determining factor when we’re making the term life insurance vs whole life comparison.

What are the disadvantages of a whole life insurance policy?


The main disadvantage of whole life insurance is the price. The policy comes with steep premiums, much higher than those you would pay with term insurance.

How long do you pay premiums on term life insurance?


With term insurance, you pay premiums for a certain period of time. Typically, term policies are purchased for five, 10, 20, or 30 years. 

Who has the greatest need for life insurance?


Life insurance is often purchased by breadwinners who want to provide their beneficiaries with a certain degree of financial protection through death benefits. The beneficiaries can be children, spouses, and even siblings. The trick is to pick the most suitable life insurance option while making a clear distinction between term vs whole life insurance.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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