Term vs. Whole Life Insurance: Which One Do You Need?

Short answer: Term life insurance covers you for a set period, such as 20 years, and usually costs less. Whole life insurance covers you for life and builds cash value, but its premiums tend to be higher. Term often fits a temporary need like raising children or paying off a mortgage, while whole life fits people who want lifelong coverage and can afford the cost.

How Does Term Life Insurance Work?

Term life insurance pays a death benefit if you die during the policy's term. State insurance regulators describe it as lower-cost coverage for a specific period. If the term ends and you're still living, the coverage stops, and there's typically no payout or cash value.

Many term policies let you renew when the term ends, but the premium for renewed coverage may be higher than your original premium. Some policies also let you convert to permanent coverage. Ask about both features, and what they'll cost, before you buy.

How Does Whole Life Insurance Work?

Whole life is a type of permanent, or cash value, life insurance. You can keep it for as long as you choose, as long as you pay the premiums. Along with the death benefit, it includes a savings element called cash value.

Because of that savings element, whole life premiums tend to be higher than term premiums for the same death benefit. Your policy includes a table of cash values that shows how the cash value is expected to build. Ask your agent which parts of the policy are guaranteed and which aren't.

Whole life is one of several kinds of permanent insurance. Universal life and variable life are also cash value policies, each with different features and risks.

How Do Term and Whole Life Compare?

Feature	Term life	Whole life
How long it lasts	A set period, such as 10, 20 or 30 years	Your lifetime, while premiums are paid
Cost	Lower for the same death benefit	Higher, because of the savings element
Cash value	Typically none	Builds over time
What happens at the end	Coverage stops unless renewed or converted	Pays a death benefit whenever you die
Often used for	Temporary needs, like income for young children	Lifelong needs, like final expenses or estate plans

How Much Life Insurance Do You Need?

Before choosing a type, decide how much coverage you need, for how long, and what you can afford to pay. Things to add up include:

1. Income your family would need to replace, and for how many years
2. Debts such as a mortgage, car loans or credit cards
3. Future costs like childcare or college
4. Final expenses, including funeral costs

Subtract savings and any existing coverage, such as a group policy through work. The result is a starting point for your coverage amount.

Which Type Is Right for You?

There's no single right answer. Regulators advise choosing a policy with features that fit your situation and making sure you can afford the premium. Some general patterns:

• Term may fit if you need a large amount of coverage for a defined period, like while children are young or a mortgage is being paid off, and you want the lowest premium.
• Whole life may fit if you want coverage that lasts your whole life, value the cash value feature and can comfortably afford higher premiums for the long term.
• Some people combine both, using a term policy for big temporary needs and a smaller permanent policy for lifelong ones.

What Should You Check Before You Buy?

• Confirm the license. Your state insurance department lists the agents and companies licensed to do business in your state.
• Ask about renewal and conversion on any term policy.
• Ask what's guaranteed in any permanent policy.
• Name your beneficiaries carefully. You can have more than one. If a beneficiary is a minor, ask about using a trust.
• Don't cancel an existing policy until the new one is in place.

The Bottom Line

Term life gives you the most coverage for the money for a set period. Whole life costs more but lasts your lifetime and builds cash value. Work out how much coverage you need and for how long, then compare quotes from licensed agents. Find more in our insurance guides.

Frequently asked questions

What is the main difference between term and whole life insurance?

Term life covers you for a set number of years and usually costs less. Whole life is permanent coverage that also builds cash value, which is why its premiums tend to be higher.

Is term or whole life insurance better?

Neither is better for everyone. Term often fits people who need a lot of coverage for a specific period, such as while raising children or paying a mortgage. Permanent policies can fit people who want lifelong coverage and can afford higher premiums.

What happens when a term life policy ends?

Coverage stops at the end of the term unless you renew or convert the policy. Renewal premiums are often higher than the original premium, so ask about renewal and conversion options upfront.

What is cash value in life insurance?

Cash value is a savings component in permanent policies such as whole life. Your policy should include a table showing how the cash value is expected to change over time.

Should I cancel my old life insurance policy to buy a new one?

State insurance regulators advise not to cancel a current policy until your new one is in force, so you're never left without coverage.

Sources

1. NAIC: Life Insurance (consumer guide)
2. NAIC: What Type of Life Insurance Is Right for You?
3. NAIC: Life Insurance Buyer's Guide

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.