Term life insurance vs whole life insurance: which is better?

What is whole life insurance?

Whole life insurance, often called whole of life insurance, is a policy that covers you for your entire life, provided you continue to pay the premiums.

This type of insurance guarantees a death benefit to your beneficiaries and ensures financial security for your loved ones when you pass away.

Whole life insurance covers you for life and includes a savings component known as the policy’s cash value.

Over time, a portion of your premiums accumulates in this account, which grows on a tax-deferred basis. You can borrow against this cash value or withdraw it, but doing so might reduce the death benefit.

The cost of whole life insurance can vary based on several factors:

• Your age and health: Younger, healthier individuals typically pay lower premiums.
• Policy amount: Higher death benefits result in higher premiums.
• Riders: Additional features, such as accelerated death benefits or long-term care riders, can increase the cost.

Joint whole life insurance policies are available, which cover two individuals under one policy. These are often used by couples to ensure both parties are protected.

What is term life insurance?

Term life insurance provides coverage for a specific period, or "term," such as 10, 20, or 30 years.

If the insured person passes away during this term, the policy pays a death benefit to the beneficiaries. However, if the term expires while the insured is still alive, the policy ends, and no benefits are paid.

Term life insurance covers you for a fixed period, making it ideal for temporary needs like paying off a mortgage or covering your children’s education expenses.

It is generally less expensive than whole life insurance, making it an attractive option for those on a budget.

Several factors can affect the cost of term life insurance:

• Term length: Longer terms generally have higher premiums.
• Your age and health: As with whole life insurance, younger and healthier individuals enjoy lower premiums.
• Coverage amount: Higher death benefits come with higher premiums.

Joint term life insurance is also available, covering two individuals, which can be a cost-effective way for couples to ensure both are covered during the policy term.

What are the differences between term life and whole life insurance? 

The key differences between term life insurance and whole life insurance include:

• Duration of coverage: Whole life insurance covers you for life, while term life insurance only covers you for a specific period.
• Cash value component: Whole life insurance includes a savings component that grows over time, which term life insurance does not offer.
• Cost: Whole life insurance premiums are generally higher than term life insurance premiums due to the lifelong coverage and cash value.
• Flexibility: Term life insurance is more straightforward, while whole life insurance offers more features and benefits, including the ability to borrow against the policy’s cash value.

What are the similarities between term life and whole life insurance? 

Despite their differences, term life and whole life insurance share some similarities, including:

• Death benefit: Both policies provide a death benefit to your beneficiaries upon your passing.
• Premiums: Both require regular premium payments to keep the policy active.
• Underwriting: Both types of insurance consider your age, health, and lifestyle factors during the underwriting process to determine eligibility and premiums.

What are the pros and cons of term life insurance?

Term life insurance has its advantages and disadvantages that you must consider. 

The pros of term life insurance

• Affordability: You generally pay lower premiums than whole life insurance.
• Simplicity: It’s an easy insurance policy to understand and manage.
• Flexibility: You can choose the term length that suits your needs.

The cons of term life insurance 

• Limited coverage: Term insurance only provides coverage for a specific period.
• No cash value: The policy does not build any savings or cash value.
• Premium increases: Renewing a term policy can lead to higher premiums as you age.

What are the pros and cons of whole term insurance?

Whole life insurance also has its advantages and disadvantages to consider. 

The pros of whole life insurance

• Lifetime coverage: Whole life insurance provides coverage for your entire life.
• Cash value: The policy accumulates savings that you can borrow against.
• Stable premiums: Premiums remain the same throughout the policy term.

The cons of whole life insurance 

• Higher cost: Whole life insurance is generally more expensive than term life insurance.
• Complexity: There are more features and benefits to understand and manage.
• Surrender charges: Early termination can result in charges and the loss of cash value.

Can I change my term life insurance to whole life insurance and vice versa?

Yes, switching between term life and whole life insurance is possible.

This process is known as conversion. Converting a term policy to a whole life policy can be beneficial if your financial situation changes and you want lifelong coverage.

Switching may incur additional costs and could affect your existing coverage.

A medical examination might be required, depending on the insurer and policy terms. To convert, contact your insurance provider to understand your options and any potential costs.

Is term life insurance or whole life insurance better for you?

The choice between term and whole life insurance depends on your individual needs and circumstances.

Term life insurance is ideal for those who need coverage for a specific period, like paying off a mortgage or ensuring children’s education costs.

Whole life insurance is best suited for those seeking lifelong coverage and a policy that builds cash value over time.

Evaluate your financial goals, budget, and the needs of your beneficiaries to determine which type of insurance best fits your situation.

Get expert financial advice

Understanding the difference between term life insurance and whole life insurance is essential for choosing the option that best suits your personal circumstances, financial goals, and long-term needs.

Both offer valuable benefits but cater to different priorities. By understanding the key differences and similarities, you can make an informed decision that provides peace of mind and financial security for you and your loved ones.

Unbiased can connect you with an insurance broker or financial adviser who can provide expert financial advice and help you choose the best life insurance policy for your unique needs.