Term Life Insurance vs. Whole Life Insurance: Which To Choose?
Which life insurance to choose is a highly personal decision based on many factors including what you're willing to spend and how long you may need the life insurance coverage.
There are pros and cons to each type of insurance...
Nonetheless, it is impossible to decide which product is best without fully understanding the differences.
Here is an insurance guide to both term and whole life insurance, along with the advantages and disadvantages of each.
With this knowledge, you will be able to work as a team with your insurance agent to choose the life insurance that is best for you.
What Is Term Life Insurance?
Term life insurance began sweeping the insurance industry in the 1980s.
The premiums are significantly lower than whole life insurance premiums, there is no cash value, and the product is easy to understand.
Term life insurance is purchased for a period of time at a guaranteed level rate, such as 1 year (or annually increasing), 10 years, 15 years, 20 years, 25 years, 30 years, 35 years and even 40 years.
Your term insurance premium is the same each month during the term that you choose.
For example, the cost of a 30-year term plan is guaranteed to remain level for 30 years. If you die during the term, your beneficiary receives the full amount of your policy. If you die after the term, and you have not renewed or converted your policy, there is no payout.
Don't Have to Die To Get Benefits On Some Term Life
Nowadays, there are also term life policies that will pay living benefits if you suffer a critical or chronic illness and you require longterm care or home health care.
There are also Return of Premium term policies that will pay you back all of the premiums that you paid into the policy if you’re still living at the end of the term.
Term life insurance is almost always renewable after the initial guaranteed level premium period is over. This means that at the end of the term, you can continue to pay for the insurance but usually at a significantly higher premium.
Can Renew Term at Higher Cost After Level Premium Ends
After the guaranteed level premium period is over, almost all insurance companies allow you to renew only on a one-year basis, which means that your premiums will go up each year.
There are a couple of insurance carriers that allow you to renew at the same cost after your initial guaranteed level premium period is over, but the amount of the life insurance starts to decrease each year.
Can Extend Term Coverage with NO New Underwriting
Almost every term life insurance policy is convertible to a longer duration more permanent type of life insurance plans, like whole life or universal life insurance, without any new underwriting.
Conversion is only available until you reach a certain age, which is typically age 65, 70, or 75.
Some term life insurance companies allow you to convert to any available permanent life insurance product (which is ideal), while others allow conversions only to a specific, limited choice of products.
What Is Whole Life Insurance?
As the name implies, whole life insurance lasts for your entire life. Your premiums will remain the same throughout your life, and your beneficiary will receive a guaranteed cash benefit when you die.
In addition, traditional whole life insurance builds a tax-deferred guaranteed cash value over time, and some “participating” whole life companies pay dividends or profits to policyholders.
Dividends are a good reason to buy whole life from highly-rated, top-quality insurance companies such as Mass Mutual, Penn Mutual, New York Life, The Guardian or Northwestern Mutual.
You can borrow against a whole life product, or even cash it out if there comes a time you no longer need or want the insurance.
Therefore, whole life can be a valuable financial planning tool since it does build cash value.
Whole Life Insurance Vs Universal Life Insurance
Some people refer to all “permanent” life insurance policies as whole life insurance, while in reality there are different types of permanent life insurance.
In fact, there are more cost-effective alternatives to traditional whole life insurance, such as guaranteed universal life for which cash value is not expected nor guaranteed, but the life insurance is guaranteed as long as premiums are paid.
If cash value in your policy does not interest you, then guaranteed universal life insurance may be the best option for you.
Better Than Term Insurance for Life
Some agents refer to guaranteed universal life (GUL) as term insurance for life, but it’s much more than that.
Many GUL companies allow you to choose the guaranteed level premium/coverage period that you’d like.
For example, you could buy a guaranteed policy to age 90, 95, or even 100 at a reduced cost compared to choosing the “guaranteed for life” product that usually provides coverage to age 121.
Many Permanent Policies Offer Living Benefits
There are also a number of guaranteed universal life companies that include living benefits for chronic and sometimes critical illness...
And some are offering cash refund options providing money back to you on a specific timetable (instead of an overall cash value) if you want to get rid of the policy prior to death..
Term Life Insurance and Whole Life Insurance Pros and Cons
One of the benefits of term life insurance is the cost. You will always pay less for a term life product than for a whole life or permanent policy that would provide lifetime coverage.
Even those who fall into a high risk group due to an illness such as heart disease and need life insurance will find that term life and diabetic term life insurance usually has lower monthly premiums.
However, term life insurance only guarantees those low premiums for the duration of the term.
When it’s time to renew, you will be older and possibly in worse health. Your premiums could significantly increase, even to the point that they become impossible for you to pay.
Buying term life with a good conversion option is a great way to to extend any portion of your insurance coverage later, without requiring a medical exam or proof of good health. Even if you only want to maintain enough to pay for final expenses or funeral cost.
Can Always Buy Term And Convert to Whole Life Later
Whole life or permanent insurance premiums are more expensive during the early years, but those premiums will not change as you grow older and possibly less healthy.
Therefore, whole life or permanent life insurance is often the smartest choice for those who anticipate future health problems and feel that they may need or want life insurance for their entire lives.
Underwriting can also be more liberal on whole life or other types of permanent life insurance as compared to term life underwriting.
Underwriting can be more liberal on permanent life insurance
So if you’ve been “rated” a Table 2 or B to a Table 4 or D rating on term life insurance, it’s possible that you could qualify for a Regular or Standard rate on a whole life or universal life policy.
If you’re over age 60 and happen to have health issues, it’s possible that a GUL insurance policy (not whole life) could be more cost effective for you than term life insurance for seniors.
Is Whole Life Insurance a Good Investment?
If you’ve maxed out your 401k, roth ira or other tax-deferred investments, then putting money into a whole life policy could make sense as another safe tax-deferred investment not tied to stock market fluctuation.
In addition, the cash value of whole life and the living benefits for chronic illness provided by permanent insurance are tremendous assets. These could be used later in life, either as supplemental retirement income or to help pay for potential long term care or home health care.
You can expect to earn a 4% to 5% internal rate of return on the cash value of a good whole life policy. This would be equivalent to about a 5% to 7% return on any taxable investment if you’re in a 28% or higher tax bracket.
Some believe whole life insurance is a good and safe investment or savings account. Others, like Dave Ramsey, say buy term and invest the difference.
Term Life Insurance vs Whole Life Insurance Rates
Let's take a look at what you could expect to pay for term life insurance, compared to guaranteed universal life and to traditional whole life.
Below are rates for $250,000 of 20 year term, Guaranteed Universal Life (guaranteed for life) and Whole Life quotes for males and females at various ages in good health. These are monthly rates:
20 Yr Term Guaranteed UL Whole Life
Male age 30: $13 $90 $156
Male age 40: $17 $131 $233
Male age 50: $39 $199 $354
Male age 60: $105 $329 $554
Male age 70: $409 $602 $961
Female 30: $11 $77 $137
Female 40: $15 $115 $203
Female 50: $30 $171 $306
Female 60: $76 $279 $474
Female 70: $257 $514 $827
As you can see from the cost comparison above, 20 year term life insurance is significantly less expensive than both guaranteed universal life and whole life.
BUT...if you may need or want life insurance for your entire lifetime, buying life insurance at the longest duration you may need/want while you're younger and/or healthier is best.
Which To Choose, Term Life or Whole Life?
Which product to choose, term life vs whole life is a personal decision and there's no "right" or "wrong" thing to do.
If you feel that you may need or want life insurance for the rest of your life, or if you’d like another tax-deferred retirement savings option, or if you may have an estate tax issue then buying whole life or another type of permanent insurance may be your best option.
If you don’t think you’ll need or want life insurance for your whole life, or if cost is an issue, then term life insurance or a shorter duration GUL may be best.
Furthermore, if you’re unsure and opt for term life, you should purchase term life from an insurance company that has great whole life or other permanent products that you could convert too later.
You Could Always Buy Both Term and Whole Life
Or you could choose the “best of both worlds,” and buy a portion of term life and a portion of permanent or whole life insurance.
For example, a $500,000 whole life policy would be very expensive at any age.
A $400,000 term life policy plus a $100,000 whole life policy could be very affordable and is just one of many great combinations of coverage that might work for you.
Whatever product or products you ultimately decide are best for you, make sure to work with an independent agent that can offer you a lot of different insurance companies and products.
Having Any Life Insurance Is Better Than having None!
Whatever type you choose does not have to be the “perfect” solution. You can always make changes later.
Just remember that having any life insurance to protect your family and loved ones is better than having none.
You can compare term life and guaranteed universal life quotes using the "compare quotes" comparison tool on top or bottom of this page.
Running whole life quotes for most insurance companies requires special software that we do have, but it's not available in an instant quoting format.