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

Term life and whole life insurance are two common types of life insurance. But that’s mostly where the similarities stop.

Term life insurance offers coverage for a set period—called a term—such as 10, 20 or 30 years. On the other hand, whole life insurance—also known as permanent life insurance—covers a policyholder for their entire life if the premium payments remain up to date.

Another major difference: Because a whole life insurance policy provides lifetime coverage, it usually costs more than a term life insurance policy. In addition, a whole life insurance policy normally includes a savings component, known as cash value, while a term life insurance policy does not.

Read on to learn more about the differences between term and whole life insurance.

Key takeaways

• Term life insurance covers a certain period of time, such as 10, 20 or 30 years, while whole life insurance covers someone’s entire life.

• Because it supplies lifetime coverage, whole life insurance generally costs much more than term life insurance.

• Both term life insurance and whole life insurance offer a death benefit. But whole life generally provides more robust features like the availability of a savings component and the capability to borrow or withdraw cash.

• Whole life insurance often is a fixture in someone’s estate-planning process, whereas term life insurance usually isn’t.

In exchange for paying premiums over the course of a period like 10, 20 or 30 years, a term life insurance policy provides a payout known as a death benefit if the policyholder dies during that period. This payout goes to the policyholder’s beneficiary or beneficiaries, such as a spouse, child or charity.

Someone can buy a term life insurance policy directly from an insurer, through an online marketplace, from an insurance broker offering coverage from several insurers, or from an insurance agent affiliated with just one company. Term life insurance also may be available through an employer as a workplace benefit.

If they’re buying a policy on their own, someone usually must answer health and lifestyle questions and undergo a medical exam when they’re applying for coverage. When someone obtains term life insurance through their employer, they generally can skip the health questions and medical exam.

Here are some of the key benefits of term life insurance:

• Lower cost: Term life insurance typically costs less than some other types of life insurance, particularly whole life insurance. Because term life insurance covers only a set period of time, its premiums tend to be lower than they are for whole life insurance.

• Temporary coverage: Since a term life insurance policy lasts only a certain amount of time, it offers temporary coverage rather than locking a policyholder into lifetime coverage. Term life insurance generally is best suited for a younger person whose family depends on them financially.

• Flexibility: In some cases, a term life insurance policy can be converted to a whole life insurance policy.

• Simplicity: Term life insurance policies are usually easier to understand than are whole life insurance policies.

Unlike term life insurance, whole life insurance covers a policyholder for their entire life as long as the premiums are paid. Furthermore, a whole life insurance policy generally includes a savings feature known as cash value.

When someone obtains a whole life insurance policy, they pick the coverage amount for the death benefit and name a beneficiary or beneficiaries. After the policyholder dies, the death benefit goes to the designated beneficiary or beneficiaries.

If someone is purchasing a whole life insurance policy on their own, they typically must complete a health questionnaire and undergo a medical exam. However, these steps might not be necessary if someone gets whole life insurance through their employer—known as group life insurance. Somebody can buy whole life insurance from an insurance agent or broker, through an online marketplace or directly from an insurance company.

Here are some of the key benefits of whole life insurance:

• Permanent coverage: If the premium payments are made consistently, coverage provided by a whole life insurance policy doesn’t end. The coverage can’t be canceled due to illness or another health issue.

• Fixed premiums: Premiums for a whole life insurance policy never go up.

• Cash value: Whole life insurance generally provides a feature called cash value. Part of each premium helps build the policy’s cash value, which a policyholder can withdraw cash from or take out a loan against.

• Dividends: In some cases, a whole life insurance policy might pay dividends, which are profits shared by an insurer. A policyholder can earmark their dividends for cash payouts or premium payments or can reinvest them in the policy.

When someone’s shopping for coverage, they’ll notice several differences between term life insurance and whole life insurance. Some of these differences include:

The costs of term life insurance and whole life insurance are based on factors such as age, gender and health status.

The big cost difference between the two comes into play when considering how long the coverage lasts. Term life insurance generally costs less than whole life insurance does. Why? Because term life insurance lasts for a set period of time, while whole life insurance lasts for a lifetime if premium payments are up to date.

Data published in June 2023 by the Policygenius insurance marketplace shows the average monthly premium is $14.30 for a 20-year term policy with $250,000 worth of coverage that’s taken out by a 25-year-old female nonsmoker. The same policy for a 25-year-old male nonsmoker costs slightly more: $17.60 a month. Average costs go up based on age and coverage amounts.

Policygenius data from June 2023 shows how much pricier whole life insurance is.

For a $250,000 whole life insurance policy, a 25-year-old female nonsmoker pays an average of $251 a month, according to Policygenius. The same coverage for a 25-year-old male nonsmoker averages $277 a month.

Coverage for a term life insurance policy typically lasts 10 to 30 years, while a whole life insurance policy covers the policyholder’s entire life as long as the premiums are paid.

A whole life insurance policy normally features a savings component called cash value. Term life insurance policies don’t offer this.

Someone can borrow against a whole life insurance policy’s cash value once enough cash has accumulated. They also should be able to withdraw cash from a whole life insurance policy, up to a certain dollar limit.

If someone obtains a whole life insurance policy from a customer-owned insurer known as a mutual company, they might receive a share of the company’s profits in the form of dividends. The same option isn’t available with term life insurance policies.

Whole life insurance is a fixture in estate planning more often than term life insurance is. That’s in large part because whole life insurance provides lifetime coverage, whereas term life insurance covers only a specific period of time.

A number of questions come up when someone is weighing term life insurance vs. whole life insurance. Here are answers to several frequently asked questions:

Term and whole are two types of life insurance, but they serve different purposes. Term life insurance is designed to pay a death benefit if the policyholder dies during the policy’s term. On the other hand, whole life insurance covers someone’s entire life, and beneficiaries receive the death benefit after the policyholder dies.

Although whole life insurance typically costs much more than term life insurance, it also offers more robust features, such as the ability for the policyholder to save cash and borrow money.

If you’re looking at whether to obtain whole life insurance or term life insurance, be sure to consider which kind of coverage will be a better fit for achieving your short-term and long-term financial goals.