Difference Between Term and Whole Life Insurance

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Differences between term and whole life insurance

Term Life Insurance

Term life insurance provides life insurance coverage for a specific amount of time. If you or your spouse passes away at any time during this term (usually 10–30 years), your beneficiaries (those you’ve selected to inherit your money) will receive a payout from the term life insurance policy.
Term life insurance plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you or your spouse passes away. In the simplest of terms, it’s not worth anything unless one of you were to die during the course of the term. Then that’s when you receive money.
Of course, the hope here is you’ll never have to use your term life insurance policy at all—but if something does happen, at least you know your family will be taken care of.

Whole Life Insurance

Whole life insurance is lifelong coverage and includes an investment component known as cash value. The cash value grows slowly in a tax-deferred account, meaning you won’t pay taxes on its gains while they’re accumulating.
You can borrow money against the account or surrender the policy for cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.
Whole life insurance is more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance.

Pros

Generally, term insurance has a much lower cost than other types of life insurance. It is simpler to understand than “permanent” policies.

Cons

Protection is only available for the term of the policy typically 10-30 years. It cannot be used as a wealth-building or tax-planning strategy.

Pros

Doesn’t expire, so you can keep it for as long as necessary. The cash value component is useful for estate planning. Works as a forced savings vehicle.

Cons

5 to 15 times more expensive than term. People buy less coverage than needed or surrender policies early due to the high cost. Surrender value of the policy change.

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