What Are The Differences Between Term and Whole Life Insurance?

Purchasing life insurance now provides a financial safety net for your dependents if you are unable to provide for them in the future. After you pass away, your family can utilize the earnings to cover funeral expenses, home payments, college tuition, and other expenditures.

There are primarily two forms of life insurance:

Term life insurance is the most straightforward and offers the cheapest rates.

Permanent insurance is more difficult to understand and typically costs more than term insurance, but it provides additional benefits. Whole life insurance is the most popular and straightforward type of permanent life insurance. Other types of permanent life insurance include variable, variable universal, and universal.

What type of life insurance is best for you? We’ll help you decide.

Are you curious? Let’s examine term versus permanent life insurance in greater detail.

Term life insurance explained

Term life insurance provides protection for a predetermined time period. Pure life insurance is sometimes referred to as such because its sole purpose is to safeguard your dependents in the event of your untimely death. Beneficiaries receive the payout if you have a term policy and die during the policy’s term. The insurance provides no additional value.

When purchasing a policy, the term is chosen. Common durations include 10, 20, or 30 years. In the majority of policies, the payout, also known as the death benefit, and the cost, or premium, remain constant during the duration of the policy.

When you shop for term life:

• Choose a term that corresponds with the years during which you will be paying your bills and need life insurance coverage in case you pass away prematurely.
• Purchase the amount of money your loved ones would require if you were no longer able to provide for them. The payout could replace your current salary and assist your family in paying for services you currently provide, such as child care.

Ideally, your family’s requirement for life insurance will terminate around the term’s expiration: Your children will be adults, your home will be paid off, and you will have a substantial amount of funds to act as a financial cushion.

Term life insurance is offered by all of the top-rated life insurance companies, making it simple to obtain quotes.

Whole life insurance explained

As with all permanent life insurance policies, whole life offers lifelong coverage and contains a cash value investment component. The cash worth increases slowly and is tax-deferred, so you do not pay taxes on its gains as they accumulate.

You can either obtain a loan against the account or surrender the policy for cash. However, if you do not return policy debts with interest, your death benefit will be reduced, and if you surrender the policy, coverage will be terminated.

Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:

• The premium remains the same for as long as you live
• The death benefit is guaranteed
• The cash value account grows at a guaranteed rate

Some whole life insurance contracts can also produce annual dividends, which are a share of the insurer’s financial surplus. You can accept the profits in cash, deposit them to generate interest, or use them to lower your premium, repay policy loans, or purchase additional coverage. Dividends are not guaranteed.

Policy differences

Policy featuresTerm life insuranceWhole life insuranceChoice of policy length✓

Provides lifelong coverage

✓Premium generally stays the same✓✓Low premium✓

Life insurance payout amount is guaranteed✓✓Accumulates cash value

✓Might be eligible for annual dividends

Cost comparison

Term life insurance is inexpensive since it is temporary and has no monetary value; typically, your family will not get a payout because you will outlive the term. The premiums for whole life insurance are substantially greater because the coverage is permanent and the policy contains cash value with a guaranteed investment return on a portion of the premiums paid.

The table below compares the costs of term and permanent life insurance. We utilized 20-year and 30-year term life insurance due to the impossibility of comparing the length of term life to whole life.

Person coveredPolicy amountWhole life30-year term life20-year term lifeMale, age 30$250,000$2,385$240$156

$500,000$4,675$403$242

$1 million$9,217$720$415Female, 30$250,000$2,114$206$141

$500,000$4,142$335$208

$1 million$8,150$585$347Male, age 40$250,000$3,508$384$210

$500,000$6,910$687$348

$1 million$13,700$1,281$631Female, 40$250,000$3,008$314$185

$500,000$5,897$553$306

$1 million$11,677$1,026$534Male, age 50$250,000$5,436$913$491

$500,000$10,802$1,725$898

$1 million$21,483$3,301$1,692Female, 50$250,000$4,569$689$375

$500,000$9,003$1,284$669

$1 million$17,760$2,349$1,233

Methodology: We averaged the three lowest quotes available in each category for healthy men and women. Source: Quotacy.

Choosing between term and whole life insurance

Term life insurance is adequate for the majority of families who require life insurance, but whole life and other forms of permanent coverage might be advantageous in specific circumstances.

Choose term life if:

Choose whole life if:– You need life insurance simply to replace your income for a specific period, such as the years you’re raising children or paying off your home.

– You desire the cheapest possible protection

– You believe you could benefit from permanent life insurance but cannot afford it. The majority of term life plans can be converted to permanent coverage. Policy-dependent conversion deadlines exist.

– You wish for your heirs to have sufficient funds to pay estate taxes. In 2017, estates over $5.49 million per individual or $10.98 million per couple are liable to federal estate taxes. State death taxes differ. The Tax Foundation has compiled the following map of state estate and inheritance taxes.

– Without a life insurance payout, your heirs may be obliged to liquidate estate assets, such as heirlooms or real estate, in order to satisfy the tax obligation.

– You have a child with special needs who is your dependent for life.

The proceeds from a life insurance policy can be used to fund a trust for a kid with special needs. If you wish to establish a trust, you should consult with an attorney and a financial advisor.

– You want to use your retirement assets while leaving an inheritance or sufficient funds for last expenditures, such as funeral bills. Your beneficiaries receive a payout from a whole life policy regardless of when you pass away.

– You wish to achieve inheritance parity. If you want to leave a business or other property to one of your children, you could utilize permanent life insurance to pay your other children.