Breeze Logo

Term life insurance vs. whole life insurance: Key differences to know

Read time
7 mins

Life insurance is an agreement with an insurance company that you'll pay a monthly premium. In exchange, your insurance company will give your beneficiaries a stated death benefit when you die.

Life insurance benefits can pay for anything you want to help your family with after you die — death taxes and bills, replacement income, a mortgage, college tuition for kids or grandkids, and more. In short, you use life insurance to take care of everyone else after your death.

You can tap into popular types of insurance — term life insurance and whole life insurance. Let's go over these two types, the costs and the benefits so you can choose the best type of insurance for you.

Term life insurance benefits

Term life insurance guarantees payment to your beneficiaries if you die during a specified term. These policies do not offer any other value (like savings or investing options) other than the guaranteed death benefit.

Term insurance covers you for a fixed period of time. You decide whether you want a policy for 10, 20 or 30 years. Your coverage ends after that period of time and no one receives any money if you're still alive when the policy expires.

Who is term life insurance best for?

You may want to consider term life insurance as a way to mitigate your debts. For example, let's say you buy a 30-year life insurance policy and you have a 30-year mortgage. Your life insurance policy covers the exact amount of time you'll have your mortgage. At that point, you may not need a life insurance policy to cover your major expenses. You may want to get term life insurance if you:

  • Just want to replace your income over a certain period, such as during child-rearing years.
  • Want an affordable policy.
  • Would like to take advantage of a conversion to a permanent policy later.

Term life insurance pros and cons

Take a look at the pros and cons of term life insurance before you jump on either a term or whole life policy.

Pros of term life

Think you want to opt for term life insurance? If you're 100% on board with the following, go for it:

  • Offers temporary coverage: You might look at temporary coverage as either a pro or a con, but when you only want it for a definite period of time, you'd definitely count it as a pro. This can hit home especially if you are the breadwinner in your family and your spouse and child will suffer financially in your absence.
  • Less expensive: If you want the maximum death benefit with the least amount of investment, term offers a great option. You can always invest your own money in stocks, index funds, or another type of fund. You'll also pay a lot less if you buy coverage when you're young and in good health, as opposed to waiting till you're older.

Cons of term life

On the flip side, take a look at the cons to getting term life insurance:

  • Limited coverage: You may not get the right amount of coverage. Let's say you have a 20-year mortgage and you decide you'll get a 20-year policy. However, you have to refinance your mortgage later on in life to a 30-year mortgage. You won't actually get the right amount in this situation. Limited coverage could end up becoming a problem for certain individuals.
  • Premium increases: Non-level term premiums can continue to rise as the years go on. A permanent life policy, on the other hand, will allow you to pay consistent premiums. If you want guaranteed premiums, you should not purchase term life insurance.
  • No option to build wealth: You may outlive your policy. In fact, only a small number of term policies ever pay out because policyholders outlive the policy.

Whole life insurance benefits

Whole life insurance offers a key benefit as a permanent life insurance policy. In other words, you get lifetime coverage with premiums that won't increase. Whole life insurance also won't expire and can't change due to your potentially worsening health or a debilitating illness.

A more complex type of insurance, whole life tends to cost more than term insurance. It also provides a cash-value account that you can tap for funds later in life. This cash grows slowly in a tax-deferred account. This means you won't pay taxes on gains while the money accumulates.

Who is whole life insurance best for?

Who should get a whole life insurance policy? Take a look at the following reasons why you may want a whole life insurance policy. You should get it if you:

  • Want to leave an inheritance to your beneficiaries.
  • Want to provide money for your loved ones to pay for federal and state inheritance or estate taxes.
  • Need to provide for a dependent after you die, such as a child with a disability.

Whole life insurance pros and cons

As with term insurance, you can tap into a few pros and cons to whole life insurance as well. Take a look at the following pros and cons of purchasing whole life insurance.

Pros of whole life

First, let's take a look at the additional benefits and an overview of each benefit.

  • Offers a cash value: You'll get guaranteed, tax-deferred growth with whole life insurance.
  • Policy loan availability: You can take out a policy loan on your whole life policy using your cash value as collateral.
  • Earnings availability: You can earn dividends if your policy provides them.
  • Premiums stay the same: You'll get the benefit of fixed premiums throughout the policy.
  • You can surrender the policy: You can cancel the policy and receive your cash benefit. Check with your insurance provider for more information about this option.

Cons of whole life

Now, the downsides. Learn a quick overview of the reasons you may want to steer clear of whole life insurance altogether:

  • Complicated: Term life insurance is less complicated than whole life. Whole life offers a lot of features but you may need your insurance agent to completely explain them.
  • Fees involved: What fees will you have to pay for your cash value benefit? Ask your insurance agent about all the fine print (and read the fine print yourself as well).
  • Not cheap: You'll pay for whole life insurance. Unless you plan to take advantage of it for the long haul and all the cash value benefits.

Which is better: Term or whole life insurance?

Choosing life insurance can be a daunting process. However, think carefully about what you want before you make your purchase. This ensures that you (and your family!) will make the best decision possible.

Your major goal with life insurance should be to care for your loved ones. Ultimately, as long as you purchase a policy, you'll be miles ahead in the life-planning game.

Melissa Brock is the founder of College Money Tips and a full-time freelance writer and editor. She loves helping families navigate their finances and the college search process.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published June 11, 2021
Related Articles
whole-life-insurance-thumbnailLast updated April 13, 2021

Whole Life Insurance: What Everyone Needs to Know in 2024

jack-wolstenholm-headshot 2x
Jack Wolstenholm
When you first buy a whole life insurance policy, it actually costs the insurance company less to provide your coverage. That’s because you are less likely to die in the early years of the policy than you are later. Plus, like all goods and services, the expenses incurred by a life insurance company increase over time with inflation.
term-life-insurance-thumbnailLast updated August 5, 2021

Term Life Insurance: What Everyone Needs to Know in 2024

jack-wolstenholm-headshot 2x
Jack Wolstenholm
Term life insurance covers the life of the person — some policies allow more than one insured — who is listed as the insured on the contract. If that person dies during the specified term, the insurance company will pay the contracted death benefit to the policy’s beneficiaries.
types-of-life-insurance-thumbnailLast updated August 3, 2021

What Are the Different Types of Life Insurance?

jack-wolstenholm-headshot 2x
Jack Wolstenholm
Term life insurance is the most common and affordable type of life insurance policy. It covers you for a specified time period. Most terms are 10, 20 or 30 years. The shorter the term, the less you will pay in premium. Your premium amount will be the same for the entire term.

Get started online — anytime, anywhere.

(Seriously, it's a breeze.)