Term vs. whole life insurance: What’s the difference?

There are plenty of life insurance options out there, including new variations on traditional coverage, but most people end up deciding between traditional term and whole life policies, each of which has its selling points.

Term life insurance is affordable and straightforward but doesn’t last for life, while whole life insurance doesn't expire, but is more expensive. Term life insurance is right for most people, since they won’t need coverage in their retirement years, but that doesn't mean it's right for everyone. Whole life insurance is best for people with lifelong dependents or more complex financial planning needs.

What’s the difference between term and whole life insurance?

The main differences between term life and whole life insurance lie in the length of coverage and premium costs. Term life insurance usually lasts 10 to 30 years, then expires, whereas whole life lasts for as long as the insured keeps paying premiums.

Whole life insurance is much more expensive than term life insurance because of the longer coverage period and because it comes with extra features, like a cash value account that earns tax-deferred interest. Term insurance doesn’t have a cash value, which makes it less complicated.

For most people, the convenience and lower cost of term life insurance make it the best choice. But a whole life policy may be a better fit if your client needs lifetime coverage or another way to invest outside traditional accounts.

What is term life insurance?

With term life insurance, the insured pays premiums regularly for a set period. If they die while the policy is active, their beneficiaries get a death benefit payout.

After 20 to 30 years, many people have fewer financial responsibilities and don’t need life insurance anymore. As long as your client doesn't need coverage into old age, a term policy is simple and cost-effective.

Pros

• Affordable premiums

• Can cancel the policy without any penalty

• No hidden fees, exclusions, or investment risk

Cons

• Expires, so the insured has to buy a new policy if they still need insurance

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that stays active for the insured's entire life. Whole life is more complex than term life because of its cash value.

The policy's cash value grows over time at a rate controlled by the insurer. The cash value can be used to take out loans or for retirement when the account matures. Some restrictions apply to when the insured can begin making withdrawals and interest on policy loans.

Pros

• Can be useful for estate planning

• Cash value acts as forced savings

• Coverage doesn't expire

Cons

• Higher premiums are difficult to afford long-term

• Other investments offer higher interest rates

• Penalties apply if you cancel coverage