Both term life and whole life insurance can provide an important financial safety net for your family. But their features and costs are significantly different. Since life insurance is a long-term purchase, it's important to choose the policy that fits your goals for life insurance.
Put most simply, term life insurance is good for people who want insurance for specific financial obligations with a known end. For example, the years until a mortgage is paid off, or the years until retirement. Whole life is good for people who want their beneficiaries to receive a payout no matter when they die. Here's a closer look:
Term vs. whole life: Which is right for you?
|You want to:||You need:|
|Provide funds that would replace your income until you retire||Term life|
|Provide funds so a spouse can pay off a mortgage||Term life|
|Cover the years until children graduate college||Term life|
|Buy the cheapest life insurance possible||Term life|
|Provide funds for heirs to pay for a funeral and/or final expenses such as medical bills||Whole life|
|Provide money after you're gone for a special needs child||Whole life|
|Provide money for your heirs to pay state or federal estate taxes||Whole life|
|Be able to access cash value within a life insurance policy||Whole life|
Some people buy multiple policies to cover needs of different lengths. For example, someone might buy a small whole life insurance policy to cover a funeral and also a 30-year term life policy to cover a 30-year mortgage.
If you're unsure what you need, consider consulting a fee-based financial advisor.
The main differences between term vs. whole life insurance
Term life insurance is the easiest to understand among life insurance types: You need to choose only an amount and a term length. You should go into the purchase understanding that you might outlive the policy. That means you could pay for 10, 20 or even 30 years without any life insurance payout if you're still living. However, the policy has served its purpose of being a safety net, even when it didn't end in a claim.
Whole life insurance provides a payout no matter how old you are when you die, as long as the premiums were paid. Whole life also has a couple layers of complexity: The policy contains a cash value account that typically builds slowly over time. You can take loans against the cash value or withdraw money from it. Some whole life policies earn dividends. That money can be used to pay premiums or buy more life insurance, or just taken as cash.
|Feature||Term life||Whole life|
|Guaranteed death benefit for your beneficiaries||Yes||Yes|
|Option to purchase riders that add coverage features||Yes||Yes|
|Builds cash value||No||Yes|
|Choices of length||Typically 5, 10, 15, 20 or 30 years||Your entire life|
|Death benefit is generally tax-free to beneficiaries||Yes||Yes|
|Opportunity to earn dividends||No||Yes, if you have a "participating" policy|
|If you don't want the policy anymore||You get nothing||You get the "surrender value" of the policy, based on cash value minus a fee|
Term life vs. whole life insurance rates
Term life insurance is significantly cheaper than whole life insurance. That's because whole life insurance is guaranteed to pay out and it builds cash value. Term life has no cash value and many policies don't pay out because policyholders outlive the term.
Life insurers generally offer a few options for payments, including monthly, quarterly and annually.
We looked at rates for a small $100,000 policy and found whole life to generally be at least six times more expensive than a 30-year term life policy.
Comparison: Term vs. whole life rates for a $100,000 policy
|Gender and age||30-year term life
|Male age 30||$174||$1,025|
|Male age 40||$245||$1,513|
|Female age 30||$145||$916|
|Female age 40||$199||$1,330|
|Source: EverQuote research. We average the three cheapest rates found for term and whole life. Rates are for men and women of average height and weight, in very good health. Your own rates will be different.|
For a $250,000 policy, rates were at least nines more expensive for whole life vs. term life.
Comparison: Term vs. whole life rates for a $250,000 policy
|Gender and age||30-year term life
|Male age 30||$277||$2,477|
|Male age 40||$354||$3,671|
|Female age 30||$238||$2,227|
|Female age 40||$293||$3,242|
|Source: EverQuote research. We average the three cheapest rates found for term and the two cheapest rates found for whole life. Rates are for men and women of average height and weight, in very good health. Your own rates will be different.|
How to save money on term and whole life insurance
- Buy a policy as soon as you have a life insurance need. Younger ages always get better rates. Also, by waiting you may develop health conditions that could push rates higher.
- You'll likely get a price break for paying annually.
- Compare quotes from multiple companies to know if you're getting a good deal.