The Differences Between Term and Whole Life Insurance

Broadly speaking, there are two types of life insurance — term life and whole life.

Just as the names suggest, term policies provide coverage at a fixed rate for a designated period term. Whole policies remain in effect throughout the insured’s lifetime.

Each type of insurance is designed with a different purpose and target consumer in mind, which is itself reflected in their coverage and costs.

For both types of life insurance the greatest contributing factors in determining the premium of an applicant’s policy are as follows:

• Age
• Sex
• Health Condition

WHAT IS TERM LIFE INSURANCE?

Term life insurance refers to policies that provide coverage over a pre-designated, yet customizable, period.

Said term can range between five and thirty years, with policies also typically available in periods of ten, fifteen, or twenty years. If the insured individual lives past their policy’s end date, they have a chance to renew it, convert it into a permanent life insurance policy—such as whole or universal life insurance—, or simply allow it to expire and terminate.

Under the parameters of a term life insurance policy, designated beneficiaries are guaranteed a set payout amount upon the insured individual’s death. This death benefit is term life insurance’s only benefit.

The payout can vary between $10,000 to over a million dollars, but it mirrors the policy’s face value in almost every single case.

WHAT IS WHOLE LIFE INSURANCE?

Whole life insurance is designed to last until the policyholder dies.

Just like term life, whole life insurance policies have premiums and death benefits that stay the same for their duration, regardless of changes in a policyholders’ age or health status. As long as the contract terms are met, the insurer will pay the policy’s beneficiaries its death benefit once the policyholder has passed away. Most whole life insurance policies require a medical examination before the applicant is considered.

Whole life insurance is part of the cash value types of permanent insurance. This also includes universal, variable, and universal variable life insurance. As opposed to other variants of life insurance, whole life policies accumulate cash value over time—an essential component of whole life insurance.

Cash value may accrue on a tax-deferred basis and can be borrowed against at generally favorable rates. Whole life policies may also present the policyholder with the opportunity to collect dividends on an annual basis.

WHAT ARE THE POLICY DIFFERENCES?

Both term and whole life insurance offer consumers stable rates for premiums and guaranteed payout amounts.

Both types of policies can also be enhanced via different riders to protect against difficult situations, such as being diagnosed with a critical or terminal illness and suffering from a disability.

However, term life insurance offers no additional savings component like those found in whole life insurance policies.

Except for the added features of certain riders, term life insurance provides customers a death benefit and nothing else.

Whole life insurance policies, on the other hand, all feature guaranteed, built-in cash value accumulation that grows according to the formula used by their insurance company. The cash value funds can then be used to pay for the policy’s premiums, create an investment portfolio, or supplement your retirement income.

Although they are not guaranteed, whole life policies can also provide dividends to eligible participating policyholders.

Another aspect where term and whole life policies differ is in duration. Term life insurance lasts for a predetermined, but customizable, period of time, whereas whole life insurance provides coverage until the policyholder's death—so long as they pay their premiums and comply with the policy’s terms and conditions.

T he difference in duration has a substantial effect on the final costs of whole versus term life insurance.

What Are the Cost Differences?

In most cases, whole life insurance is significantly more expensive than term life insurance. There are several reasons for this, the chief one being that whole life policyholders are investing in the cash value portion of their policy in addition to its basic premium.

This adds up quickly, more so when taking into account other expenses such as the commission fees that insurance agents charge for whole life. Many insurance agents receive major incentives from companies for selling whole life policies. Customers usually end up paying even higher premiums as a result.

Another key factor in the difference between the cost of term and whole life insurance is the likelihood of an insurance agency having to pay out claims. Whole life insurance covers policyholders for life, meaning that the agency will eventually have to pay out a claim at some point. 

Term life insurance policies have an expiration date, so it is statistically improbable that a young or middle-aged individual dies before the policy finishes its pre-established term. By then, the insurance company may have collected years’ worth of premiums, without having had to pay out a single dollar. Whole life is a greater investment for the insured because it represents permanent coverage—and the insurance company will have to pay out at some point.

On average, term life ends up being a more affordable option for the majority of customers. Nonetheless, it’s important to note that term life insurance gets exponentially more expensive as one ages, particularly after the age of 50. When renewing a term life insurance policy, policy owners should be aware that the price they paid when they first purchased it will not be the same as when they apply for it again.

*Average annual rates for males, aged 40

SHOULD YOU GET BOTH TYPES OF LIFE INSURANCE?

There are a couple of scenarios in which getting both term and whole life insurance could be a wise decision.

Some consumers can’t afford to get as much coverage as they want with just a whole life policy. A potential alternative for those that still want whole life insurance is to get an additional term life policy. This way, they avoid any gaps in coverage from their current insurance, while still keeping premiums lower than they would otherwise be.

Policyholders who already have whole life insurance might also want to consider a term life policy as they reach certain milestones in their lives. Buying a new house or having another child, for example, are events that could create a need for greater life insurance coverage.

However, these are only temporary financial obligations; one day the home will hopefully be paid off and the children will have left the household. Term policies can greatly help during these times and are often more affordable than simply increasing permanent policy coverage.

Another scenario assumes that the customer is not buying both types of policies at the same time, but is “upgrading” from one to the other instead. This is accomplished without having to go through a medical exam via the Term Conversion Rider.

Many young people and families do not have the means to pay for a whole life insurance policy and instead prefer the affordability of term life. Those who want to purchase whole life down the line can benefit from starting out with a term life policy and upgrading it later. However, there is a deadline on when this kind of rider can be used without providing any additional health information. If the deadline passes, the traditional application process for a whole life policy must be followed.

MAKING A FINAL DECISION

Ultimately, the decision between term and whole life insurance depends on the policyholder's intention. Term life is great for those who wish to cover their family's expenses in the event of an untimely death.

That’s why term life policies are typically set to last until one’s expected retirement age, or until the policyholder's children are no longer financially dependent. The income replacement from the policy could allow beneficiaries to continue paying expenses, including mortgages and tuition, or to otherwise maintain their quality of life.

Because the price of term life insurance increases sharply after reaching the age of fifty, we recommend that individuals older than that consider whole life insurance as well. Although expensive, whole life insurance is a great option for those who wish to cover their final expenses. These may include hospital bills, funeral costs, and debt settlements.

Since whole life insurance is guaranteed to last until the policyholder’s death, the stresses associated with end-of-life arrangements can be alleviated for the insured individual's beneficiaries. Whole life insurance is also a good option for families who’ve accumulated wealth and want a more comprehensive policy than what term life insurance can offer.

Consumers that wish to further explore their life insurance options can explore our list of the top life insurance providers.