Term vs. Whole Life Insurance: A Plain-English Comparison

Key takeaways

• Term life insurance covers you for a set number of years. Whole life insurance is permanent coverage that lasts your whole life and builds cash value.
• Term usually costs less in the early years. Whole life costs more but doesn't end as long as you pay the premiums.
• Many term policies can be renewed or converted to a cash value policy, which can help if your health changes.

Term vs. whole life insurance is one of the first choices you'll face when you shop for coverage. Both pay a death benefit to the people you name. The difference is how long the coverage lasts, how the premiums work and whether the policy builds cash value. This guide explains each in plain English so you can see which fits your needs.

How term life insurance works

Term life insurance is a policy you buy for a set period of time, like 10 or 20 years. If you die during that term, the policy pays your beneficiaries. If you outlive the term, the coverage ends.

The NAIC describes term insurance as designed to provide lower-cost coverage for a specific period. Most term policies don't build cash value.

Two features are worth knowing:

• Renewal. Most term policies can be renewed at the end of the term, even if your health has changed. The new premiums will be higher. Ask what they would be, and whether you lose the right to renew at a certain age.
• Conversion. Many term policies let you trade them for a cash value policy during a conversion period. More on that below.

How whole life insurance works

Whole life insurance is a type of permanent, or cash value, life insurance. You can keep it for as long as you choose, as long as you pay the premiums. You typically pay whole life premiums on a set schedule.

Part of what you pay builds cash value inside the policy. The NAIC notes that cash value policies make it possible to get money from the policy while you're still alive. If you borrow against it, any unpaid loans plus interest are subtracted from the death benefit.

Whole life isn't the only kind of permanent coverage. Universal life is another. With universal life, you can choose a flexible premium payment pattern, as long as you pay enough to keep the policy in force. Indexed universal life (IUL) is another option some people consider; you can learn how it works on our IUL page.

Term vs. whole life insurance side by side

Term vs. whole life insurance: cost over time

The NAIC puts it simply: term insurance generally has lower premiums in the early years, but it doesn't build cash value you can use in the future. If you want coverage for a longer period, such as your lifetime, cash value insurance may be more cost effective.

So the real question isn't "which is cheaper?" It's "how long do I need this coverage?"

• If you need coverage for 15 or 20 years, term was built for that kind of need, and its lower early-year premiums can leave room in your budget.
• If you need coverage that never ends, compare what it would cost to keep renewing term at older ages with the cost of permanent coverage today.

Whatever you choose, make sure you can afford the premium both now and later. The NAIC suggests asking what the highest premium could be to keep your coverage.

When term life tends to fit

• You want to protect your family while children are growing up.
• You want coverage that lasts until a mortgage is paid off.
• You want to replace your income during your working years.
• You want the most coverage you can get for a set budget right now.

Not sure how much coverage you need? Our guide to how much life insurance you need walks through a simple formula.

When whole life tends to fit

• You want coverage that lasts your whole life, no matter how long you live.
• You want to leave money to family or a charity.
• You want to make sure final expenses are covered.
• You like the idea of cash value you can access later, and you can afford the higher premium.

Term conversion: a bridge between the two

A conversion option is one of the most useful features a term policy can have. The NAIC says you may be able to trade many term policies for a cash value policy during a conversion period, even if you aren't in good health.

That matters for people over 55. If your health changes, you may have trouble qualifying for a new policy. With a conversion option, you may be able to move into permanent coverage without a new health review. Keep in mind that the premiums for the new policy will be higher than what you were paying for term.

Before you rely on conversion, check your policy for:

• The conversion deadline (the age or policy year when the option ends)
• Which permanent policies you can convert to
• Whether you can convert all or only part of your coverage

Mixing term and whole life

You don't have to pick only one. Some families use a larger term policy for needs that end, like a mortgage, and a smaller permanent policy for needs that don't, like final expenses. If you already have coverage, the NAIC advises comparing it with any new policy and not canceling your current policy until the new one is in place.

The bottom line

Term life covers a set number of years at a lower early cost. Whole life covers you for life, costs more and builds cash value. Choose based on how long you need coverage and what you can comfortably pay.

A licensed agent can quote both on our life insurance page and show you the trade-offs for your age and health.