Term vs. Whole Life Insurance: Why Term is Almost Always Better

Term insurance protects your loved ones and costs significantly less than whole life
Last updated Sep 13, 2020 | By Ben Luthi
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As a former life insurance agent, I’ve spent untold hours studying different coverages and explaining how life insurance works. What I’ve learned is that shopping for life insurance can seem overwhelming. After all, there are countless providers to choose from and different types of policies you can get.

One of the biggest debates you may find is term vs. whole life insurance. Despite the fact that term coverage is the best option for the vast majority of consumers, it only made up 22% of premiums paid through Q3 in 2019, according to research group LIMRA.

This is partly because whole life and other forms of permanent insurance coverage are much more expensive than term coverage. However, insurance agents also encourage people to buy whole life and other permanent insurance policies, even when it’s not the best fit. Here’s what you need to know if you’re trying to decide between term and whole life insurance.

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Term vs. whole life insurance: How are they different?

There are three main types of life insurance that you can buy, and each can come in different forms. In addition to term and whole life insurance, you may also be offered universal life coverage.

Whole and universal life are considered permanent insurance, which means they don’t expire as long as you continue to pay your premiums. With term coverage, however, your policy expires at the end of the term specified in your policy documents. Here’s a more detailed breakdown of each option.

Term life insurance

The most popular term life policies last between five and 40 years, during which your payments remain the same. There are other, more complicated options available with longer terms and premiums that change over time, but they’re not as common.

Term life insurance is relatively cheap because life insurance companies are much less likely to pay out on a term policy than a permanent policy with no expiration date. You’re covered under your policy during the term, but once it expires, you’ll need to renew your policy or purchase a new one.

However, when you do this, your premiums will probably increase based on your age and health, both of which will have likely changed since you first got your policy. If you no longer need life insurance because you have sufficient retirement savings or no dependents who may need financial support, you don’t need to continue your coverage.

Whole life insurance

Whole life insurance lasts for the lifetime of the policyholder, which can make it appealing for someone who needs coverage but may not be able to requalify for term insurance due to health issues.

It also comes with a savings component that grows over time — this is called the cash value of the policy. As your cash value account grows, you can borrow from it, and you may even be able to use it to pay your premiums, which remain the same throughout the life of the policy.

If you decide to cancel the policy in the future, you’ll get the amount of the cash value in return. Life insurance agents may use this feature to sell whole life insurance as an alternative vehicle for retirement savings.

However, cash value grows slowly, and it can take decades to accumulate a significant amount of savings. Also, whole life insurance is much more expensive than term insurance — sometimes five to 15 times the cost — which makes it unaffordable for most people.

Universal life insurance

Universal life coverage is another form of permanent insurance that has no expiration as long as you pay your premiums. Unlike whole life, however, universal policies typically give you some flexibility with your premiums.

For example, you may pay a single premium upfront or pay fluctuating premiums over time. If you don’t pay the minimum required to cover the cost of insurance, however, you may lose the policy.

Any premiums you pay in addition to the cost of insurance are added to the policy’s cash value account, which grows over time. If you have enough cash value, you can use it to cover your premiums instead of paying them out of pocket.

Because of the way the premium structure is set up, universal coverage is typically more expensive than term coverage, but may not be as expensive as whole life insurance.

Whole life vs. term insurance: Which is better?

I won’t lie: whole life insurance has some appealing features. But here’s a secret: life insurance companies often push whole and universal life insurance policies because their commissions are tied to the policy premiums — the higher the premium, the more they get paid.

But if you’re looking to get coverage for your family, it’s essential to focus on the fundamental purpose of life insurance. That is to provide a financial benefit to your loved ones if you die.

For that primary purpose, term insurance is the best life insurance option for most people because it provides a death benefit and doesn’t cost a lot of money. Even if you’re trying to get life insurance for your children, you can typically get an add-on to your policy to cover them as well.

One of the features agents may highlight with whole and universal policies is the cash value component. However, paying such a high premium for a glorified savings account leaves less room in your budget for other important financial goals. As a result, buying term and investing the difference between your rate and the rate you’d pay with permanent insurance may give you a better long-term result.

FAQs about term life insurance

As you try to determine the right fit for you, here are some other frequently asked life insurance questions you may have about term coverage.

Is term life insurance a good idea?

Term life insurance is worth it if you have loved ones who will experience financial hardship if you die. Even if you don’t have a spouse or children, the cost of a funeral alone could be financially devastating for some families.

As such, it’s a good idea to work with a life insurance agent to determine how much insurance coverage you need based on your situation.

What happens to term life insurance at the end of your term?

This depends on the type of policy you have. Many policies come with a guaranteed renewability feature that allows you to renew your policy on an annual basis after its initial term expires. However, your premiums will increase exponentially from the rates you were paying during the initial term, and they’ll increase every year.

The second option is to simply purchase a new policy, which requires you to submit a new application and potentially undergo another medical exam. Your premiums on the new policy will be based on your age and health, just as they were with the first policy.

Third, some term life insurance policies come with the option to convert your policy to a permanent one. This may be a good idea if your health situation makes it difficult to requalify for term insurance.

Can you cash in term life insurance?

Term insurance policies don’t come with a cash value component, so you can’t cash in on them.

Think of it in terms of renting vs. buying. As with renting, term life insurance gives you the benefit of coverage during the term of your contract. Once that contract ends, however, you don’t get to cash in on the value of the property itself.

Can you cancel term life insurance?

You can cancel your term life insurance policy whenever you want. Keep in mind, though, that canceling your policy will result in you forfeiting the benefits of the contract.

The final word on life insurance

Life insurance is an essential part of a solid financial plan, so it’s important to find the right fit for you. Although whole and universal life insurance policies come with some features that make them worth considering for some people, term insurance is often the best option because of its low cost.

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