Term vs whole life insurance

If you have a spouse, children, or others that rely on your income, life insurance can provide financial support to your family if you’re not there. While term and whole life insurance can both provide a payout¹ to your family if you die, there are key differences you want to be aware of when deciding which policy to get.

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How much is term life insurance?

The three main types of policies are term life, whole life², and universal life. Term life policies provide affordable temporary protection; whole life and universal life policies are also called "permanent" insurance because they are designed to provide life-long protection with wealth-building benefits³. The most common difference between term insurance and whole life insurance is what the insurance can do.

Term life insurance is insurance that you can buy to cover a set period of time, or a term. That term can generally be anywhere from 10 to 30 years, depending on how long of a period you want to be insured for. Term life insurance is a straightforward type of insurance that will pay whomever you designate as your beneficiary a lump sum of money should you pass away during the term of the policy. Term life insurance is usually more affordable because it has a set expiration date⁴.

People who have a tight budget usually consider term life insurance because the premiums may not be as expensive as the whole life insurance premiums. Also, people may only want to carry insurance for a set period of time. For example, when you have a child, you may want to consider a term life insurance policy of 20 years, so that if you were to die before the child was grown and out of the house, your partner or your child would get a lump sum of money that could help them maintain their lifestyle. Or, if you get married later in life and want to make sure that your spouse has a financial cushion to fall back on should you pass away first, you may consider buying a 20- or 30-year term policy instead of a more expensive whole life policy.

Whole life insurance, on the other hand, can be more complicated. The premiums for whole life insurance typically cost more. But, that’s because you’re paying for additional guarantees and benefits. Whole life insurance is similar to term insurance in that it will also provide money to your beneficiary when you die. But, with a whole life policy you may also earn dividends⁵ on the money from the policy and you can borrow against the policy if you need money during a financial hardship⁶. Also the premium cost for whole life insurance is typically fixed⁷. Even though the premiums for whole life insurance typically cost more up front they remain the same as long as you live, which can help save you money over the course of your lifetime.

Which is better – term or permanent, whole life insurance?

When deciding on which type of life insurance is the right coverage for you, you may consider your financial goals and what you want to accomplish by having life insurance. Whole life typically has higher up front premiums, but you can borrow⁸ from the policy if you run into a financial emergency. It also lasts until the end of your life usually, although there may be a maximum age, and provides continuous coverage for your family⁹. Term life insurance expires on a set date and you may need to purchase a new policy after that, so there may be a gap in your coverage if you don’t buy a new policy once it expires. Another consideration should be whether you want your partner, your children, or another family member or friend to be your beneficiary.

What are common term vs whole life insurance pros and cons?

A good way to start the process of choosing which type of life insurance coverage may best fit your needs is to look at some common pros and cons of both types¹⁰.

Term life insurance pros:

• Less expensive premiums

• Choose the term length that works best for you

• You can cancel the policy at any time

Term life insurance cons:

• The term expires and you may need to get a new policy

• The new policy premiums may be higher

Whole life insurance pros:

• Coverage for your whole life

• Premium cost remains the same as long as you live

• May earn dividends

• Can borrow against the cash value of the policy

Whole life insurance cons:

• Premium cost can be between five to 15 times as high as a term policy¹¹

• You may not buy enough coverage and then need additional policies

• Your financial needs may change and make the high cost of the premiums too much for your budget