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Whole vs. term life insurance: What's the difference?

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Understanding the difference between whole and term life insurance is important when choosing a policy. Getty Images

Life insurance provides protection and financial security when things go wrong. In the case of life insurance, that would be the death of the policyholder. By ensuring that a policy is in place, the insured helps ease any potential financial burdens (at least, for a certain period of time) by providing financial support in the form of a life insurance payout.

How much life insurance someone should have is subjective, however, and can be dependent on a variety of personal factors. The type of life insurance policy chosen is also specific to one's personal circumstances and preferences. There is no single recommended type for everyone. That's why it's helpful to understand the difference between the two most well-known life insurance types: whole and term.

If you're currently in the market for life insurance then start by getting a free price quote so you know exactly what to expect.

Before deciding the kind of insurance policy you want, make sure you understand how both primary types work.

Whole vs. term life insurance

There is no one-size-fits-all answer when it comes to life insurance. You may already even have a life insurance type chosen for you by a spouse, family member or employer. But understanding the differences between whole and term can assist you in making the best choice for you and your loved ones.

Whole life insurance

Whole life insurance tends to be more expensive because you have more options. Also commonly known as permanent life insurance, this type remains active for the full life duration of the insured. There is no policy expiration date. Consequently, premiums are relatively high.

But there's another factor to consider with whole life insurance: the cash and investment aspect. Some whole life insurance policies pay a dividend. You can also build up the dollar value of the policy and cash it out to use for other expenses, to pay off debt and more. This type of life insurance should also be viewed as an investment - as the extra cash the insurance company has received from the premiums is invested for you. 

Just understand that you won't have immediate access to cash once the policy goes live. You'll still need an adequate cash amount in the account before you can use it (and it takes time to build that up).

In short, whole life insurance is pricier but the benefits may be worth it. You can easily get a free price estimate online now. 

Term life insurance

This type of coverage is self-explanatory. It's limited to a select term or time frame of your life. It won't last for the policyholder's full life span and it will need to be renewed. Terms can be 15, 20, 30 years or some other agreed-upon time frame. If the policyholder dies during one of these terms then the policy is paid out to the beneficiaries. If they don't, and the policy isn't upped for another term, then no payout will be issued.

Because of the time constraints and the fact that payments are not invested nor do they accrue a cash-out value, premiums for term life insurance are generally cheaper than whole life insurance. But each time you renew, expect premiums to rise. This is doubly true if you get sick or experience a high-risk medical condition during one of your terms. 

Differences between whole and term life insurance

Ultimately, both types of life insurance offer your loved ones some financial protection if you die. When you purchase life insurance, you can list one or multiple beneficiaries and determine how you want to distribute the proceeds. While whole life insurance seemingly offers the better path, it doesn't necessarily mean it's the better option for the policyholder. 

To sum it up, here are some key differences between the two policies:

  • Length: A whole life insurance policy is not dictated by pre-determined time frames. A term life insurance policy, on the other hand, involves coverage within a specific time frame (usually between 10 and 30 years) chosen by the policyholder. 
  • Cost: If searching strictly by cost, term life insurance may be the better route. Sure, it won't last forever and it will, by definition, only offer coverage for a select term. But maybe that's all that's needed. This particularly applies to younger people or those just starting a family who are looking for protection but don't want to break the bank in the process. 
  • Cash value: With whole life insurance, you can possibly get a dividend or withdraw a portion of the cash value (note: it's usually a good idea to allow your money to grow before taking this action). Term life insurance has no cash value.

Regardless of where you fall in this range and what your personal preferences and circumstances are, most financial advisers agree it's smart to have life insurance. Whether it's term or whole isn't as important as just having the protection in place. Remember, policies can always be adjusted and preferences change (especially as the insured ages) but coverage and protection for you and your family will remain vital.

Still not sure which life insurance type is right for you? Get a free price quote online now to learn more.. 

How to get cheap life insurance

While term life insurance is more affordable than whole, there are still some trusted ways to get cheaper insurance regardless of the type you choose. Here are a few methods to consider:

  • Start early: The younger you are, the safer a bet you are to insurance companies. Accordingly, you'll pay less than you would if you were older. If you don't have insurance already then get started now before rates rise.
  • Complete a thorough process: "Simplified" life insurance may not require a medical exam. But you won't get cheaper life insurance by going without it. Don't pay more for less. Complete the traditional life insurance vetting procedures. This is especially important for the young and healthy - by taking just a few more steps now you can save both in the short term and over the duration of the policy. And if you're really opposed to a medical exam then consider no-exam life insurance policies as an alternative.
  • Comparison shop among companies: Review at least three providers to make sure you're getting the best coverage for the most reasonable cost. This can potentially save you thousands of dollars over the life of the policy so it pays to shop around to get the best deal. Use the table below to get started. 
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