Term life insurance is cheaper than whole life but covers you only for a specified number of years.

The difference between term and whole life can be boiled down to cost and duration. Term life is inexpensive compared with whole life. It covers a set period and pays beneficiaries if you die during that term. Whole life generally lasts your entire life and includes a savings component called "cash value," making it more complex and expensive.

With either policy, loved ones receive the insured amount, called the death benefit, to cover expenses such as funerals, mortgage payments, college tuition, and more. Depending on your coverage needs, one type may suit you better.

Overview

Here is a quick overview of how each type works to help clarify the differences.

What Is Term Life?

Term life insurance is straightforward: it covers a fixed period, such as 10, 20, or 30 years, and pays beneficiaries if you die during it. If you outlive the term and coverage ends, beneficiaries receive nothing. Most policies guarantee the same death benefit and premiums throughout the term.

Ideally, your term should match the financial obligation being covered. A new parent, for example, might buy a 20-year policy lasting until a child is financially independent. All leading life insurers sell term policies, making quotes easy to find and compare online.

What Is Whole Life?

Whole life is the most common type of permanent life insurance and costs more than term coverage. Most policies are designed to last a lifetime and pay regardless of when you die. Whole life also has cash value: part of your premiums goes into an account that grows over time. Once enough accumulates, you can borrow against it or surrender the policy for cash.

Although more complex than term life, whole life is simpler than other permanent insurance. Premiums remain the same throughout your life, and cash value grows at a fixed rate. The death benefit is also guaranteed unless you take large cash value loans. You do not have to repay policy loans, but the insurer deducts outstanding balances from the final death benefit paid to beneficiaries.

Most whole life policies are "participating," meaning you may earn dividends based on the insurer's financial performance. You can use dividends in various ways, including increasing cash value.

Term vs. Whole Life: Policy Features

Policy Feature	Term Life	Whole Life
Choice of policy duration	✓
Builds cash value		✓
Provides lifetime coverage		✓
Premiums generally stay the same	✓	✓
May qualify for annual dividends		✓
Life insurance payout is guaranteed	✓	✓
Low premium	✓

Term vs. Whole Life: Cost

Term coverage is usually the most affordable because it is temporary and has no cash value. Whole life premiums are much higher because coverage lasts a lifetime and the policy builds cash value. Here is a comparison of annual premiums for $500,000 term and whole life policies.

Person Insured	20-Year Term	30-Year Term	Whole Life
Man, 30	$229.	$358.	$4,308.
Woman, 30	$193.	$300.	$3,802.
Man, 40	$341.	$595.	$6,388.
Woman, 40	$289.	$476.	$5,467.
Man, 50	$840.	$1,506.	$9,875.
Woman, 50	$654.	$1,137.	$8,347.

How to Choose Between Term and Whole Life

Term insurance is enough for most families, but whole life and other permanent coverage can help in certain situations.

Choose Term Life if You:

• Want coverage only for a specified period. Term coverage can replace income if you die while you still have major obligations, such as raising children or paying a mortgage.
• Want the most affordable coverage. Term life is the least expensive option, especially if you are young and healthy.
• Think you may want permanent insurance but cannot afford it now. Many term policies can be converted to permanent coverage. Conversion deadlines vary by policy.
• Do not want to use life insurance as an investment vehicle. A cheaper term policy lets you save what you would have spent on whole life and perhaps invest it elsewhere.

Choose Whole Life if You:

• Can comfortably afford the higher premiums. Whole life is a lifelong commitment, so make sure you can afford it. Missed premiums could cause your policy to lapse.
• Want to leave money to your heirs. The death benefit can potentially serve as an inheritance. If you name beneficiaries, payment goes directly to them rather than through your estate.
• Have a lifelong dependent, such as a child with disabilities. Life insurance can fund a trust to care for your child after you are gone. Consult an attorney and financial advisor before establishing a trust.
• Want insurance that builds guaranteed cash value. Whole life cash value grows at a guaranteed rate set by the insurer.

Other Life Insurance Options

If you need lifetime coverage but want more investment choices than whole life provides, consider other permanent insurance types.

• Universal life insurance earns interest based on current market rates.
• Both variable life and variable universal life insurance give you access to direct stock market investing.
• Indexed universal life insurance earns interest based on stock indexes such as the S&P 500.

While whole and term life premiums are generally set at the outset, these alternatives often have variable costs based on cash value performance and coverage type. That can produce substantial savings or unexpected expenses.

As always, discussing your individual needs with a financial advisor is an excellent first step.

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