Term vs. whole life: What’s the difference?

Term life insurance and whole life insurance are both ways to protect your family financially after your death. These policies pay out a death benefit to your beneficiaries, supporting those who depend on your income.

Term life coverage is in force for a limited time. Once the period of coverage ends, the policy expires.

Whole life insurance lasts indefinitely up until your death. As long as you pay your premiums, the policy doesn’t expire. You also can build cash value through a whole life policy that you can tap into during your lifetime. Let’s look at each in more detail.

What is term life?

Term life insurance offers coverage for a preset period term. Terms typically range from 10 to 30 years or more. If the policyholder dies at any point during this term, their beneficiaries – as named in the policy -- receive a death benefit.

However, if the policyholder does not die within the term period, the policy expires and no death benefit is paid out.

Term insurance is great for people who need a policy for a specific period, such as when their children are young. Term insurance only lasts for a limited time and does not accumulate any type of cash reserve for the policyholder, so it tends to be affordable.

The downside of term insurance is that if the policyholder does not die within the term, the policy simply expires. However, most term life policies can be converted to permanent coverage at the end of the term.

What is whole life?

Whole life insurance -- often known as “permanent life insurance” -- does not expire like term insurance. Instead, the policy remains in effect for as long as the policyholder pays the premiums. As with term insurance, a death benefit is paid to the beneficiaries when the policyholder dies.

Whole life insurance also typically includes what is known as “cash value.” This is money from the premium that is set aside and grows tax-deferred over time at a guaranteed rate. Policyholders can use this money to pay for expenses during their lifetime, even the life insurance premiums on the policy.

People usually choose whole life because the coverage doesn’t expire unless they stop paying the premiums. Some people also choose these policies because of the potential for tax-deferred cash value growth.

However, permanent life insurance policies tend to be significantly more expensive than term life insurance. Additionally, other types of investments will likely provide better growth for your money than a whole life cash value account.

Term vs. whole life costs

Term life insurance is usually much cheaper than whole life insurance. That’s because term life insurance coverage only lasts for a specific period, whereas a whole life insurance policy remains in effect as long as the policyholder pays the premiums.

In addition, a whole life policy usually has a cash-value component, and bigger premiums are necessary to fund the cash value.

Whether you buy term life insurance or whole life insurance, many different factors will impact how much you pay. They include things such as the amount of coverage you intend to purchase, as well as your:

  • General health status
  • Age
  • Gender
  • Occupation
  • Hobbies

Term vs. whole life policy features

Term life insurance and whole life have the same main feature: the death benefit. Both can provide a large sum of money to the beneficiary when you die.

However, only whole life offers a cash value account that grows on a tax-deferred basis.

Both policies can include riders like long-term care, waiver of premium, and living benefits. Which of these is offered will depend on the life insurance company you’re buying from. Some policies may even include riders at no extra charge.

Term vs. whole life: Which is right for you?

Your individual circumstances will determine whether term life or whole life is the right choice for you, says John Carroll, senior vice president and head of insurance and annuities at LIMRA and LOMA.

"The key factor to determining whether you should buy term or permanent coverage is the length of time you need coverage," Carroll says.

As a general rule, term coverage is for temporary needs, he says. "Do you need the coverage until your kids grow up? Until your mortgage is paid off?" If so, a term life policy might make the most sense for you.

However, whole life insurance might be a better choice if “you have a longer-term need, such as paying final expenses or leaving an inheritance,” Carroll says. Term life can be converted to whole life later, saving money over the years.

Carroll notes that some people also may choose term coverage because it costs less. On the other hand, others will choose permanent coverage because they want the ability to build cash value.

If you aren’t sure which policy to buy, Carroll recommends consulting with an adviser.

“The important piece is to get some type of life insurance -- whether term or permanent -- to protect your family’s financial future,” he says.

Life insurance FAQs

How many years are the longest term life policies?

As a general rule, the longest life-insurance policies typically last for 30 years. However, if you look long and hard, it is possible to get a 40-year policy. Protective is one company that offers this type of policy.

Can you change to whole life from term life?

Yes, it is common for life insurance companies to offer the option of converting a term life policy to a whole life policy. Typically, you can convert at no cost, but the premiums for the new whole life policy are likely to be significantly higher than the premiums for the term life policy.