Term Life vs. Whole Life: Which One’s Best for You?

by Dan Mattia | October 05, 2018

Take a moment and think about where you are in your life right now, both financially and how far along you are toward your life goals. Whether or not you

Take a moment and think about where you are in your life right now, both financially and how far along you are toward your life goals.

Whether or not you currently have life insurance, your insurance needs are probably different right now compared to 20 years down the line, right?

Life changes quickly, especially if you’re just now really starting your life. Perhaps you’ve recently tied the knot or a little mini-you is on the way (congrats!). In either case, your financial situation is likely to change drastically over the next couple of years, never mind decades. So, too, will your insurance needs.

That’s where the discussion about term life and whole life often begins: how long each policy will cover you. Before we get into the nitty-gritty of which one might work best for you, let’s look at what term and whole life insurance have to offer.

What is Term Life Insurance?

Term life insurance is simple life insurance, but it’s simplicity is its strength. Three basic components make up a level term life policy:

  1. Your term: 10, 15, 20, 25, or 30 years
  2. Your preferred coverage: $50,000 to $1.5 million.
  3. Your premium: Make the same monthly payment through the end of your term.

Term life insurance is designed to provide ample coverage at a time when you’re most financially vulnerable. Before you’ve had the opportunity to maximize your income (like climb the corporate ladder), pay down your debt (helloooo, student loans!), or grow a healthy savings account.

If you outlive your term, you can choose to apply for a new term life policy or self-insure with pensions and other investments.

Is Term Life For You?

You know yourself best. Term life insurance is a great option for most American adults, especially if you have a tight budget.

Term Life Pros

  • Affordable, fixed monthly rates. With a level term policy, your monthly payment never changes.
  • Fixed term length agreement. (10, 15, 20, 25, and 30-year terms here at Bestow)
  • Death benefit is guaranteed to be paid out tax-free to beneficiaries if you die within the term period (and claim is approved).

Term Life Cons

  • You might outlive the term (🎂)
  • If you do outlive the term, there is no return of premium, so you don’t get any money back.
  • You can add a return of premium rider to your policy that you get part or all of your premium payments returned back to you. However, these policies are more expensive.

What is Whole Life Insurance?

Whole life insurance is exactly what it sounds like: its’ insurance that lasts for your whole life (except it’s actually more complicated than that).

It’s for this reason that whole life is frequently referred to as “permanent life insurance.” As long as you pay your premium, you’ll maintain coverage from the date your policy comes into force until your policy eventually pays out upon your passing (unless you discover the fountain of youth).

Premiums for whole life insurance are based on the same underwriting factors as for term. In contrast, however, whole life premiums are often six to eight times more expensive than a comparable term life policy. Why? Cash value.

Cash value is the “living benefits” provided by whole life insurance. A part of each premium payment contributes toward growing the policy’s cash value. You can tap into your cash value to take out a loan, pay your premiums, or surrender the policy for its cash value amount.

If the living benefits of whole life insurance appeal to you, pump the brakes for just a moment. If purchasing whole life insurance with the goal of using it as an investment vehicle, you may be better off investing the equivalent of whole life insurance premiums in another way, like a mutual fund.

Because whole life insurance is in force for as long as you’re alive (and pay your premiums), your beneficiary will always receive the death benefit, no matter how old the policy.

Is Whole Life For You?

It depends. Financial advisors recommend whole life insurance to high income earners or those in more complicated tax situations, like estate tax issues.

Whole Life Pros

  • There’s no term. It’s permanent as long you’re making payments.
  • Just like term life, the death benefit is guaranteed to be paid out tax-free to your beneficiaries if you die within the term period (and claim is approved).
  • Premiums grow tax-deferred cash value from which you can withdraw or borrow.
  • Great for complicated financial situations.

Whole Life Cons

  • Your monthly payment may or may not be a set amount.
  • It’s expensive. Many surrender their policies and incur fees to cancel their coverage.
  • Using the cash value can reduce the death benefit (if loans are not paid back), subject you to taxation, or result in the surrender of the policy.
  • Cash value builds slowly. You must continue to pay premiums to keep the policy in force (or use cash value after sufficient accumulation).

Compare Term Life and Whole Life Insurance Quotes

So how hard will a life insurance premium hit your wallet? Buying life insurance at a younger age rewards your foresight and planning with a lower monthly premium.

AgeCoverageTerm LifeWhole Life
25$250,00010-year term: $15/mo., 20-year term: $17/mo.$96/mo.
35$250,00010-year term: $15/mo., 20-year term: $19/mo.$112/mo.
45$250,00010-year term: $31/mo., 20-year term: $41/mo.$216/mo.
55$250,00010-year term: $56/mo.$528/mo.
Quotes are provided by Bestow and Policygenius and based on a healthy non-smoking male resident in Texas.

Once you’ve found a policy you like, proceed through the purchasing process and breathe a deep sigh of relief. Whether you’ve purchased a term or whole life policy, you’ve gone ahead and covered yourself (and your loved ones) with a life insurance policy that works for you.