Term life insurance
Term life insurance is a “pure” insurance policy: when you pay your premium, you’re just paying for the death benefit that goes to your beneficiaries in the event of your death. The death benefit can be paid out as a lump sum, a monthly payment, or an annuity, although most people ask the insurance company for the lump sum. Term policies are more affordable. They expire at the end of the term, which lasts up to 30 years.
Whole life insurance
Whole life insurance, on the other hand, has a death benefit but also a cash value, where the premiums you pay monthly or annually are partially used to fund that cash value. A major part of the premium goes to fees and maintaining the death benefit; over time, the fees portion decreases and more of the premium goes directly to funding the cash value.
Due to the fees and the extra feature, a whole life insurance policy can cost six to 10 times as much as a term life policy (for the same death benefit amount).
Whole life lasts for as long as you pay the premiums. However, the cash value component can make whole life more complex than term life because you have to consider surrender fees, taxes, and interest as well as other stipulations.
Still, it may be worth it if you need the cash value to cover things like endowments or estate plans, which might benefit from the greater options that a whole life policy provides.
Term vs whole life insurance
| FEATURES | TERM LIFE INSURANCE | WHOLE LIFE INSURANCE |
|---|---|---|
| Duration | 1 – 30 years | Life |
| Cost | $25-35/month | 6-10x more than term |
| Guaranteed Death Benefit? | Yes | Yes |
| Guaranteed Cash Value? | No | Yes |
| How Cash Value Grows | N/A | Earns interest at a predetermined fixed rate |
| Premiums | Can increase periodically or stay level for the policy duration | Level |
| Notes | No risk of losing coverage, but no cash value when term ends | No risk compared to other permanent types, but you may find better investment options elsewhere |