Term Life Insurance vs. Whole Life Insurance

term life insurance vs whole life insurance differences policy pros cons

The process of shopping for life insurance is a complex and time consuming one, and one of the biggest questions that can take up the most time and effort in this process is that of Term Life Insurance policies and Whole Life Insurance policies. What is the difference between these two types of life insurance policies? Which is better? The answers to these questions are complex, but having a good understanding of what each of these policy types offers can make the process of choosing a specific policy to suit your needs much quicker and easier. 

We are going to run through the difference between term life insurance and whole life insurance for you below, helping you to get your head around these different types of insurance policy. With the help of this guide, you will be equipped with all the information you need to start making the decisions about life insurance policies that you need to make, all with full confidence and minimal stress. 

What Is Term Life Insurance? 

Term Life Insurance is the default, standard type of life insurance. It is the basic, reliable option that gives death benefit protection without any developing investments or cash value growth. This is typically the most affordable life insurance policy option, and costs can be very low if you sign up while young and in good health. 

Term life insurance is purchased for a limited period of time, meaning that it will only payout if you die during that period of time. The term in question could be as short as a single year, or could be far longer, potentially covering several decades! As you might expect, if you die during the term of your term life insurance, then the policy will pay out to whoever your named beneficiary is. 

If your term ends, you will need to buy another term life insurance policy, with its costs adjusted to reflect your current age and health levels. In some cases, however, you will be able to add time to your current policy without having to recalculate the monthly costs involved. This is a safer option but may well require you to lock into a very long coverage term in order to lock in the favorable rates. 

What Is Whole Life Insurance? 

Whole Life Insurance differs from Term Life Insurance in a number of important ways. Whole Life Insurance offers you both standard death benefit protection and a slow build-up of cash value. The other major difference is that this type of policy will last for your entire life without changing costs, regardless of changes in your health situation. That makes it much harder to change to a different policy, but if you are confident that you want to stick with the same policy long term, then Whole Life Insurance might be a great option for you. 

The funds inside your whole life insurance policy grow in cash value at a rate determined by your insurance company. You don't have to pay tax on the gain until you withdraw the money because the cash is accrued on a tax-deferred basis. The rate of return is generally very low, but it can add up effectively over time. It is possible to withdraw money from the account before your death, but you will have to pay tax on this withdrawal, so it is generally not recommended. Also, if you withdraw too much, the policy will lapse, and you will lose your death benefit coverage! 

The Different Costs Of Term And Whole Life Insurance 

There is a big difference in cost between whole life insurance and term life insurance. If you are relatively young and healthy, term life insurance can be very affordable, while whole life insurance costs start much higher. However, as you age, the costs of term life insurance increase, while the costs of whole life insurance will stay constant. If you plan on sticking with the same insurance policy for your whole life, then a whole life insurance policy might end up cheaper in the long run! 

The best way to calculate the different costs of term insurance and whole life insurance for you, taking into account all of the factors affecting costs, is to see Insurance Geek's Term vs. Whole Life insurance calculator for more information. Calculators such as this can help you to get a sense of the numbers in question and what the scale of difference between the policy types is.