Term life and whole life policies are the bedrock of the life insurance industry. They both provide a death benefit to protect your family’s assets and lifestyle after you’re gone. However, death benefit aside, the two types of policies have very different features.
One provides long-term coverage that can earn you money, while the other only offers coverage for a defined number of years. And when it comes to cost, these two policies are miles apart.
It’s important to understand the way term and whole life policies work and to be clear about your goals and needs. But don’t worry, we’re here to show you how easy it is to find the perfect coverage for you and your family.
What is the difference between term and whole life insurance?
Whole Life Insurance
Whole life insurance is often referred to as permanent insurance because it’s designed to cover you from the time you purchase a policy, until you pass away. Whole life is a traditional form of life insurance that features a fixed premium rate and pays a fixed death benefit.
The policyholder pays a whole life premium according to a schedule. Insurers may give you the option to pay monthly, quarterly or every six months. The policy covers you as long as you continue to pay the premium.
Value to beneficiary
When the insured person dies, the whole life policy pays the face value to the beneficiary. For example, a $50,000 whole life policy would pay the beneficiary that total amount. Whole life policies are still attractive to some people because they don’t have an age limit. A policy will pay the same death benefit if the insured dies at 50 or 101 years of age.
Whole life policies also include a savings account, which pays dividends determined by the provider. Once the policy matures, you can borrow from the savings account or cash out a portion of the policy if you no longer need the coverage.
One of the most popular features of a whole life policy is that you usually don’t have to take a medical examination to qualify, unless you’re over 50. But the downside to whole life insurance is the price. According to a 2020 Forbes report, you could pay a premium of more than $4,000 per year for a $500,000 whole life policy.
Term Life Insurance
Terms and Medical Requirements
Term life insurance covers you for a specific period and pays a set face value. For example, you might purchase a $500,000, 20-year term policy. Terms typically range from five to 30 years. The 20-year term policy is the most popular, according to the Insurance Information Institute.
Term life policies usually require taking a medical exam to qualify and they don’t cover you for your entire life. Once the term ends, so does coverage. However, many policies feature a renewable option which allows you to renew the policy for another term, oftentimes without taking another medical exam.
Many term life policies have an age limit, usually around 80. So, if you want to renew a 20-year policy at age 65, the insurer might only offer you a 15-year term to continue coverage.
Term life insurance companies base your premium on your health at the time of application, your age and your life expectancy.
Term life insurance is much more affordable than whole life for people in good health. A 40-year-old man can purchase a $500,000, 20-year term life policy for as little as $28 per month.
Decreasing Term Policies
A term life policy can have a level or decreasing term. Level term policies pay the original face value throughout the term, while a decreasing term policy decreases the death benefit over the life of the term, usually at a monthly or yearly rate.
There isn’t really an upside to purchasing a decreasing term policy, because you’ll still pay the same premium throughout the term. Luckily, most term life policies have a level term, but it’s important to know what you’re getting before you sign an agreement.
Convertible and return-of-premium Term Policies
Some term life policies are convertible, allowing you to convert them to a permanent policy after a certain period, oftentimes without taking another medical exam. Other term life policies come with a “return-of-premium” feature.
With most term life policies, you’re left empty handed when the term expires. But a policy with a return-of-premium feature pays back a portion of the money you paid after the term ends. Usually policies that include this feature have much higher premiums.
Whole life and term life policies have one major thing in common, they both pay a death benefit. If you have a $100,000 term life policy and die during the term, your beneficiary will receive $100,000.
Likewise, if you purchase a $100,000 whole life policy and continue to pay the premium until you die, that policy will pay $100,000.
Whole and term life policies also approach an applicant’s age in a similar way. With both types of life insurance, you’ll pay a lower premium if you purchase a policy while you’re relatively young. If you wait until you’re in your 60s, you’ll pay a much higher rate or may not qualify due to a medical condition.
But the two types of policies have a few significant differences. Term life only covers you for the length of the term, while whole life continues to cover you until the end of life. Most term life policies require passing a medical exam to qualify, while whole life policies usually don’t require an exam for people under 50.
If you purchase a whole life policy at a young age, the process will likely only involve signing documents. But the term life process is usually much more involved.
To prequalify, you must answer a long list of questions about your health history, current health and your family’s health history. The insurer will also ask about your lifestyle, questions such as whether you use tobacco products or enjoy dangerous activities such as rock climbing.
If you prequalify, you’ll then need to pass the medical exam. The insurer will base the policy’s premium on your answers on the prequalification questionnaire and the result of the medical examination.
The savings account feature of a whole life policy sets it apart from term life coverage. Although some term life policies include a return-of-premium feature, most don’t.
Which is better: Term or whole life insurance?
Choosing the best type of life insurance will depend on your goals and needs. If you just need protection for a certain number of years, a term life policy is all you’ll need.
Planning for your future
For example, if you expect your kids to leave the nest in about 15 years, you could buy a 15-year term life policy. Or, if you just purchased a new home, with a 30-year fixed mortgage, you might buy a 30-year term policy that could pay off the house if you pass away before your spouse.
If you need a term life policy as income replacement to protect your family’s assets after you’re gone, multiply your current pre-tax salary by the number of years your family will need to rely on the death benefit. For instance, if you make $50,000 per year, and think your surviving spouse can recover financially 10 years after your passing, purchase a $500,000 policy.
If you’re looking for a policy that will earn money, whole life insurance is the way to go. The savings account of a whole life policy will pay dividends, but only an amount determined by the insurer. A couple of modern variations of the whole life policy can enable you to make even more money.
Universal life policies work like whole life policies, but funds deposited into their savings account earn money based on a money market interest rate. After your universal life policy matures, you can also alter the premium payments.
Variable life insurance policies provide permanent coverage, while offering even more flexibility by enabling you to invest the savings portion of your policy in bonds, money market mutual funds or stocks. However, variable life policies can pose a greater risk because you could decrease your savings and death benefit if your investment underperforms.
You can also choose different types of life insurance policies at various stages of your life. You can get a great premium rate on a permanent life policy if you purchase one while you’re a young adult. If you choose a flexible policy, like variable life, and invest well, you could see significant earnings by the time you retire.
And, you can use term life policies for added protection during critical periods of your life. For instance, if you just sent your daughter off to college, you could buy a 5-year term policy to cover the cost of her education in case you pass away before she graduates.
Frequently asked questions
Is whole or term life insurance more expensive?
Whole life has much higher premiums than term life. However, many factors determine the cost of life insurance, including your age, health and life expectancy. For the best rate, purchase a life insurance policy before middle age.
What happens if I outlive my term life insurance?
Term life coverage expires when the term ends. If your policy terminates, you won’t receive any money back, unless your coverage includes a return-of-premium feature, which most don’t. However, if you purchase a renewable term policy, you’ll have an opportunity to continue coverage at the end of the term.