How to decide between term and whole life insurance

Weigh the lower premiums of term life vs. the permanent coverage of whole life.

By Mary Beth Eastman   

Life insurance protects the people who depend on your income. The premiums you pay in life guarantee a benefit is paid out to your beneficiaries on your death.

Understanding the difference between term life and whole life, the two main types of life insurance, is key to deciding which insurance to buy. After all, whether you buy term life or whole life, you want to know that you’re making a smart decision.

Term life: Cheaper insurance, with an end date

You can think of term life insurance as temporary. That is, it’s insurance for a specified term, or length of time -- say, 20 years. When the term ends, so does the coverage.

Because term life insurance has an end date, it’s good for insurance needs that also have an end date:

  • Covering a mortgage on a house

  • Protecting dependent children

  • Paying off a loan that has a cosigner

  • Covering the costs of your funeral

Term life premiums are generally less expensive than whole life, making it easier to take out a larger policy. But they only pay if you die during that term. Also know that when you renew your policy, your premiums will probably go up.

That’s why some people prefer a term life policy that lets you convert it to whole life before it expires.

Whole life: Insurance with an investing component

Whole life insurance lasts your whole life. It’s a type of permanent insurance. As long as you pay the premiums, it never expires, and your costs never go up. No matter when you die, your beneficiaries receive their benefit.

Whole life insurance also includes an investing component, called cash value. Whole life premiums are typically higher than term life premiums. That's because some of your payment is deposited into this cash value account.

Whole life insurance may be a good fit for people who:

  • Appreciate a form of forced savings

  • Want guaranteed returns

  • Don’t mind higher premiums

  • Need permanent insurance

Is whole life insurance a good investment?

You might find the idea of a whole life policy very appealing. Not only does the policy pay out if you die, but it the cash value account benefits you in life. The cash value account typically earns modest interest, and the taxes are deferred. 

However, If you withdraw money, it will be deducted from the death benefit, with interest. You can borrow against this cash value if you need to, too, but you’ll have to pay it back, with interest. 

The insurance company sees this cash value account as offsetting the cost to insure you. If you die, they pay out the stated face value of your policy, but keep the cash in the cash value account. In other words, the cash value part of the account will benefit only you.

That’s why some people prefer to buy a term life policy and invest in the market instead.

So which is better, whole life or term life?

Term life:

  • Lower premiums

  • Cover specific financial obligations

  • Predetermined end date

  • Expensive to renew

Whole life:

  • Higher premiums

  • Lifelong guarantee

  • No end date

  • Accrues cash to borrow against or pay premiums with

Life insurance is an important way to protect your family and loved ones after you’re gone. Review your current policy and shop for a new one if your needs have changed.