Term Life vs. Whole Life Insurance: Which Should You Choose?

A few years ago I was shopping around for life insurance and did not know what was the difference between Term Life vs. Whole Life Insurance or which one to choose. Needless to say, I scheduled a meeting with an insurance agent who walked me through what each was and which one would best fit into my life at that time.

We all grapple with this decision when first shopping for life insurance. But the ultimate decision is really based on your why in getting life insurance. With either policy, your loved ones can spend the payout on a variety of costs, such as funeral expenses, mortgage payments, college tuition, and more. But depending on your coverage needs, one type of life insurance may be a better fit than the other.

Continue reading to learn more about term life vs whole life insurance and decide which type of life insurance is right for you.

What is Term Life Insurance?

Term life insurance provides financial protection for your family over a fixed period of time, typically lasting 10 years to 30 years. If you die during that period, your beneficiary will receive the death benefit typically a lump sum of money tax-free.

Term life insurance covers almost any type of death caused by illness or an accident and is accessible to almost anyone, even if you have a pre-existing condition or you’re on a budget. 

Advantages of Term Life Insurance

  • Affordable: Term life is more affordable than other types of life insurance and can provide a financial safety net to your loved ones without complicated tax, premium or payout complications.
  • Straightforward: Term life policies don’t come with complex tax implications or restrictions.
  • Coverage only when you need it: Term life insurance provides financial protection during your productive years, when you have multiple financial obligations, like paying a mortgage or putting your children through college.

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Disadvantages of Term Life Insurance

  • The main drawback of term life insurance is that it has an expiration date. If you still need life insurance by the time your term coverage expires, you’ll have to buy a new policy.
  • It has no cash value component: Term cannot be used as an investment strategy.

What is Whole Life Insurance?

Whole life insurance is a type of permanent life insurance that provides coverage for your entire life. Like all life insurance products, whole life pays a tax-free death benefit to your beneficiaries upon your death. But it also has a cash value that earns interest over time.

Advantages of Whole Life Insurance

  • Whole life insurance doesn’t expire so your beneficiaries will receive the death benefit payout regardless of when you die, as long as you’ve paid your premiums to keep your policy active.
  • The cash value that whole life policies have builds interest over time — and offers a guaranteed rate of return that grows at a fixed rate. Unlike your death benefit, you’re able to access your cash value while you’re still alive.

RELATED: When Should You Consider Getting Life Insurance

Disadvantages of Whole Life Insurance 

  • Whole life insurance policies are five to 15 times more expensive than term life policies. If you take out a whole life policy and then find you can’t afford to keep it, you risk leaving your family without protection.
  • Investment returns: Whole life insurance offers lower returns than other investment options 

How to Choose Between Whole and Term Life 

Your choice between the two will greatly depend on your financial situation, your budget, and your coverage needs. 

Who is Term Life a Good Fit For?

  • Term life is right for you if you want an affordable way to leave a death benefit behind to financially support your loved ones and you expect to self-insure in the future.
  • If you only want life insurance to cover you for a specific period of time.
  • If you want the most affordable coverage. Term life insurance is the least expensive option, especially if you’re young and healthy.

Who is Whole Life a Good Fit For?

  • Whole life is right for you if you want to build cash value or have long-term dependents.
  • If you can afford the higher premiums. Note, If you miss your premium payments, your policy could lapse.
  • If you want to leave money for your heirs. The death benefit from whole life policies can potentially be used as an inheritance. If you name life insurance beneficiaries on your policy, the payout will go directly to them and not through your estate.

The Bottom Line

Life insurance is not a one-size-fits-all solution for everyone. If you’re just looking for a simple and affordable way to provide your loved ones with a financial safety net if you die, a term life policy may be a good option for you. But a whole life policy may suit your needs better if you’re a high earner or have long-term financial obligations.

Also, make sure to discuss your individual needs with a life insurance consultant before making your selection.