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Term vs Whole Life Insurance: How to Choose the Right Policy for You

term vs whole life insurance

Signing up for the right life insurance policy is a life-changing decision that can have a lasting impact on your financial future. In this article, we’ll explore more about term vs whole life insurance, providing everything you need to know to make an informed decision. From the advantages and disadvantages of each policy type to how each can influence age and health on your premiums, you’ll get the information here.

Understanding the Differences Between Term and Whole Life Insurance Policies

Knowing the differences between these two types of policies in life insurance can help people to go and sign up for the right kind of life insurance that meets their overall requirements to be financially secure and stable in the future. 

More Life Insurance Helpful Articles:

What is Term Life Insurance?

Term life insurance policies offer coverage for a certain timeline 10, 20, or 30 years) Term life has lower premiums which makes it affordable and easier to pay for individuals with low income. 

It is also well-suited for individuals who are looking for affordable coverage for a period of time, such as the length of a mortgage or until their children are grown. 

What is Whole Life Insurance?

Whole life insurance policies offer lifetime coverage and have fixed higher premiums. 

Cash value accumulation and loaning against the policy are two of the most popular features in whole life insurance. 

This type of life insurance is designed to provide permanent protection and can also serve as an investment vehicle.

How Do These Policies Differ? 

While term life insurance is generally cost-effective and has straightforward coverage, whole life insurance offers more comprehensive coverage and investment potential, but with higher premiums.

Pros and Cons of Term Life Insurance vs Whole Life Insurance 

Term Life InsuranceWhole Life Insurance
Pros– Straightforward and affordable.– Provides lifelong coverage.
– Predetermined coverage for a specific period.– Guarantees a death benefit payout.
– Ability to choose the coverage and term that fits needs and budget.– Allows for cash value increase.
– Fixed premiums provide financial stability and predictability.
– Death benefit payout is tax-free for the beneficiary.
Cons– Doesn’t accumulate cash value.– May not be the best choice for those who only need coverage for a lengthy period.
– Difficult or expensive to renew or convert policy as age or health status changes.– Cash value may not be easily accessible and can take time to increase its value.
– Premiums can increase significantly after initial term expires.
– No benefit or payout if outliving the term of the policy.

Without a doubt, life insurance can give financial security for your loved ones in the event of your untimely death, which is a very important benefit. However, there are also some drawbacks to consider. 

Pros of Term Life Insurance 

Term life insurance offers a straightforward and affordable way to protect your loved ones financially in case of your unexpected death. 

With it includes a predetermined amount of coverage for a specific period of time, affording you to carefully choose the coverage and term that best fits your needs and budget. 

Cons of Term Life Insurance

Term life insurance doesn’t accumulate cash value like some other types of life insurance and it can be difficult or expensive to renew or convert your policy as you age or your health status changes. 

Premiums can increase significantly after the initial term expires, making it more expensive in the long run. If you outlive the term of your 

policy, you won’t receive any benefit or payout.

Pros of Whole Life Insurance

Whole life insurance provides lifelong coverage and guarantees a death benefit payout. It also allows for cash value increase, which can be borrowed against or withdrawn as needed. Premiums are fixed, providing a level of financial stability and predictability.

Another good thing with whole life insurance is the death benefit payout which is tax-free for the beneficiary.

Cons of Whole Life Insurance

Whole life insurance may not be the best choice for those who only need coverage for a lengthy period of time. The cash value of a whole life insurance policy may not be easily accessible and can take lengths of time to increase its value.

How to Decide Which Type of Insurance is Right for You

Weighing on which type of insurance to sign up for can take some time and that is perfectly fine. In doing so, not only do you get to explore all the possibilities, but also take serious considerations of your financial resources that can largely impact your future. 

Below is a table of rates for term life vs whole life insurance:

Type of Life Insurance Average annual premium
Term life insurance$640 ($53 per month)
Whole life insurance$620 ($52 per month)

Factors to Consider When Choosing A Policy

When opting for a life insurance policy, below is a table of information that simplifies each factor  during the selection process of signing up for one:

What Affects The Cost of Life Insurance 
Health status Pre-existing conditions, such as diabetes or lupus, can affect rates and is same for alcohol, drugs, or tobacco use.
Family’s health and its history if anyChronic or hereditary illness, such as Alzheimer’s disease or breast cancer, may indicate future health issues and cause increased premiums. 
Lifestyle and Job Some professions, such as construction, are more dangerous than others. The same is true for high-risk hobbies like rock climbing or scuba diving.
Amount of coverage The bigger the death benefit, the higher the premium. Riders, or optional coverage add-ons such as accidental death and dismemberment, can also influence premiums.
Type of policy Term life insurance is cost-effective but has no cash value. Whole life insurance tends to have higher premiums, cash value, and can be loaned against at any time. 

Understanding Your Life Insurance Needs

To determine how much life insurance coverage you need, you should consider factors such as your health status, current debts, future expenses, and income replacement needs. 

How to Determine the Coverage Amount You Need

Calculating the closely estimated life insurance coverage amount can seem like it can take so much time and energy, but it doesn’t have to be. 


Start by calculating your outstanding debts, such as loans and mortgages, and your daily living expenses, including food, utilities, and transportation costs. Factor in future expenses, such as college tuition and retirement. 

Case Studies Comparing the Cost and Benefits of Term and Whole Life Insurance Policies

Consumer Reports conducted a study in 2015 that compared the costs and benefits of term and whole-life insurance policies. They found that for most people, term life insurance is the more cost-effective option. Whole life insurance can be 5-10 times more expensive than term life insurance for the same coverage amount.

Factors that Impact the Cost of Term Life Insurance vs Whole Life Insurance

Factors that impact the cost of term life insurance include the insured’s age, health, and lifestyle habits such as smoking. Younger and healthier individuals generally pay lower premiums for term life insurance. 

On the other hand, the cost of whole life insurance is affected by similar factors as term life insurance, but also takes into account the investment component, which can be impacted by interest rates and the performance of the underlying investments. 

Age and Health

Age and health are two critical factors that significantly affect the cost of term life and whole life insurance policies. Generally, younger and healthier individuals pay less for insurance coverage than older or less healthy individuals. 

Gender and Lifestyle Habits

Generally, women tend to have longer life expectancies than men, which means that they may pay lower premiums for the same coverage. Lifestyle habits such as smoking, excessive alcohol consumption, or engaging in dangerous activities can increase the likelihood of premature death and lead to higher premiums for both types of policies. 

Medical Underwriting

In term life insurance, medical underwriting is used to determine the applicant’s health status and any pre-existing conditions that could increase their risk of death during the policy term. As a result, individuals with underlying health conditions may face higher premiums or may be denied coverage

altogether.

Inflation and Investment Returns

Inflation can erode the value of money over time, which means that the payout from a policy purchased many years ago may not be enough to cover the cost of living at the time of a claim. This is why it’s important to consider inflation when choosing a policy, as it can affect the amount of coverage needed to adequately protect your loved ones.

Investment returns can also impact the cost of whole life insurance, as the premiums paid for these policies are invested by the insurance company. If the investments generate lower returns than anticipated, the insurance company may need to increase premiums to cover the cost of providing the guaranteed death benefit. 

Understanding the Role of Riders in Term and Whole Life Insurance Policies

In term life insurance, riders can offer a variety of benefits such as accidental death coverage, accelerated death benefits, and disability income protection. 

Riders In whole life insurance can also provide additional benefits such as long-term care coverage, guaranteed insurability, and waiver of premium. 

What are Riders?

Riders are generally available at an additional cost and can be added to a policy at the time of purchase or later on.

Here are some examples of common riders in life insurance:

  • Accelerated death benefit rider – This allows the policyholder to receive a portion of their death benefit if they are diagnosed with a terminal illness.
  • Waiver of premium rider – This waives the premiums on the policy if the policyholder becomes disabled and is unable to work.
  • Child rider – This provides life insurance coverage for a policyholder’s child.
  • Accidental death benefit rider – This provides an additional death benefit if the policyholder dies as a result of an accident.
  • Guaranteed insurability rider – This allows the policyholder to purchase additional coverage at a later date without having to undergo a medical exam.
  • Long-term care rider – This provides coverage for long-term care expenses if the policyholder becomes unable to perform certain activities of daily living.

How to Use Riders to Customize Your Policy 

Here are some steps to follow when using riders to customize your policy:

Assess your coverage needs – Think about what types of risks you are exposed to and what types of additional coverage you may need. 

Research available riders – Once you have assessed your coverage needs, research the available riders that your insurance provider offers. 

Consult with your insurance agent – Your insurance agent can help you understand the different riders available and which ones maybe best suited to your needs. 

Understand the cost – Adding riders to your policy will typically increase your insurance premiums. 

Add the riders to your policy – Once you have selected the riders you want to add to your policy, work with your insurance agent to add them to your policy. 

Examples of Popular Riders

Listed below are some popular life insurance riders:

  1. Accidental death rider – This rider provides an additional death benefit if the insured dies as a result of an accident.
  2. Waiver of premium rider – This rider waives the premium payments if the insured becomes disabled and unable to work.
  3. Critical illness rider – This rider provides a lump-sum payment if the insured is diagnosed with a specified critical illness, such as cancer, heart attack, or stroke.
  4. Long-term care rider – This rider provides a daily or monthly benefit if the insured becomes unable to perform activities of daily living, such as bathing or dressing, due to a chronic illness or disability.
  5. Guaranteed insurability rider – This rider certainly allows the insured to purchase additional coverage at specific intervals without having to go through the underwriting process again.
  6. Term conversion rider – This rider allows the insured to convert a term life insurance policy into a permanent policy without the underwriting process. 

How to Choose the Right Insurance Company for Your Term or Whole Life Policy 

Narrowing down the options to apply for the right insurance company is a crucial decision that requires careful planning.

Research the company’s financial strength – The financial strength of an insurance company is crucial as it indicates the ability of the company to pay claims. 

Compare premiums and policy features – Premiums can vary significantly between insurance companies, so it’s essential to compare policies from different providers. 

Check the company’s customer service – You’ll want to choose an insurance company that provides excellent customer service, as this will ensure that you receive the support you need when you file a claim or have questions about your policy. 

Read reviews and ask for referrals – You can learn a lot about an insurance company from reviews by customers and referrals from friends and family. 

Consider the company’s underwriting process – Some companies may have more lenient underwriting guidelines than others, which can affect your premium rates.

Factors to Consider When Choosing an Insurance Company

Some of the factors you should consider when choosing an insurance company include the company’s financial stability, reputation, customer service, coverage options, and pricing. You may also want to look at the company’s claims process, discounts and incentives, and any additional benefits they offer to their customers. 

The Importance of Research and Due Diligence

Life insurance is an investment and it’s highly crucial to do your research and due diligence to fully understand the various types of life insurance policies available and their associated features, costs, and benefits. 


By taking the time to do your homework, you can have peace of mind knowing that your life insurance policy provides the protection your loved ones’ needs. 

How to Use Term and Whole Life Insurance Policies in Estate Planning

Term and whole life insurance policies can be useful tools in estate planning. Both policies can be used to provide for beneficiaries in the event of the policyholder’s death. In estate planning, term life insurance can be used as temporary coverage for a specific period, such as while children are young and dependent on the policyholder’s income. 

Whole life insurance can provide a tax-free death benefit to help cover estate taxes, pay off debts, or provide for heirs. Its policies can build up cash value over time, which can be used as collateral for loans or as a source of retirement income. 

Understanding the Role of Life Insurance in Estate Planning

In estate planning, life insurance plays an important role on account of its ability to provide financial protection for loved ones in the event of the policyholder’s death. In addition, life insurance can also be used as a tool to pay for estate taxes, debts, and other expenses that may arise after death. 

How to Choose the Right Type of Policy for Your Needs

To ensure that you get the coverage you need, you should first assess your insurance needs and evaluate the risks you face. Then, consider the different types of policies available and compare their features, benefits, and costs. 

How to Designate Beneficiaries

Designating beneficiaries is an important aspect of estate planning. To do this, you need to fill out a beneficiary designation form provided by the financial institution or insurance company where you hold accounts or policies. 


Be sure to choose your beneficiaries carefully and review your designations periodically, especially after major life events like a marriage, divorce, birth, or death. 

The Benefits of Combining Term and Whole Life Insurance Policies

By combining both policies, individuals can have the best of both worlds, as they can benefit from the low premiums of term life insurance while still having a permanent coverage option with a cash value component. 

This strategy can provide flexibility, allowing policyholders to adjust their coverage levels over time as their needs change. 

What is Hybrid Life Insurance?

Hybrid life insurance is a type of policy that has the elements of both life and long-term care insurance. 

It is a useful option for individuals who want to plan for both their end-of-life expenses and the potential need for long-term care in the future.

The Benefits of a Combined Policy

A combined policy, also known as a package policy, is an insurance policy that simplifies 

multiple coverages into one. Its benefits include convenience, cost savings, 

and comprehensive coverage. With a combined policy, individuals or businesses can have all of their insurance needs met with one policy, simplifying the insurance process and reducing paperwork.

How to Choose the Right Combination 

A common strategy is to combine a term policy with a permanent policy to provide coverage during different stages of life. For example, you may purchase a term policy to provide coverage during your working years when you have a higher income and financial obligations, and a permanent policy to provide coverage in retirement when your income is lower and you want to leave a legacy for your loved ones.

Tax Implications of Term vs Whole Life Insurance Policies

The tax implications in the policies of term life and whole life insurance differ. With term life insurance, premiums are generally not tax-deductible, but death benefits are paid out to beneficiaries tax-free.

In contrast, whole life insurance policies come with higher premiums, but the policyholder can get tax-deferred cash value over time. At the time of the policyholder’s death, the death benefit is paid out tax-free, but any cash value remaining in the policy is subject to taxes. 

How Life Insurance Policies are Taxed 

Life insurance policies can be taxed in several ways:

Premiums paid for life insurance policies are not tax-deductible. This means that you cannot claim them as a deduction on your tax return.

Death benefits paid out to the beneficiary of a life insurance policy are generally not taxable. This is because the IRS considers them to be a return of the premiums paid into the policy, rather than income.

However, if you receive any interest or other earnings on the policy’s cash value, those earnings may be taxable. This is true whether you withdraw the money from the policy or borrow against it.

If you surrender the policy and receive more than the total premiums paid, the excess amount may be taxable as income.

If you transfer ownership of a life insurance policy to another person or entity, you may trigger a taxable event. This is because the transfer is considered a gift, and gift taxes may apply.

The Impact of Tax on Your Policy

Taxes can impact the premiums you pay, the benefits you receive, and the taxes you may owe on those benefits. For example, the premiums you pay for a life insurance policy are not tax-deductible, but the death benefit paid out to your beneficiaries is generally not subject to income tax.

On a similar note, health insurance premiums paid by an employer are often tax-deductible, while benefits received from disability insurance may be taxable depending on the circumstances. 

Common Misconceptions About Term and Whole Life Insurance Policies

Contrary to popular belief, term life insurance isn’t always the cheaper option and doesn’t 

always expire before death. To add, whole life insurance isn’t always the more expensive option and can be a valuable investment in certain situations. It’s important to understand the differences between these two types of policies and consult with a financial professional before making a decision.

Debunking Common Myths and Misconceptions

Some of these myths include the belief that life insurance is only necessary for those with dependents or that it’s too expensive for the average person. However, the truth is that life insurance can be affordable and beneficial for a wide range of individuals, regardless of their family status or income level. 

FAQs

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

Term life insurance provides coverage for a specified period of time, while whole life insurance provides coverage for the entirety of the policyholder’s life.

Which is better, term or whole life insurance? 

The type of life insurance you buy entirely depends on your individual financial needs and circumstances. Term life insurance is typically more affordable and provides coverage for a specific period, while whole life insurance offers lifelong coverage and includes a savings component, but is generally more expensive.

How much life insurance coverage do I need? 

A general rule of thumb is to have coverage that’s 10-12 times your annual income. 

What factors impact the cost of life insurance?

The cost of life insurance can be influenced by various factors such as age, health, lifestyle, coverage type and amount, as well as underwriting standards of the insurer.

How does age and health affect my life insurance premiums?

Life insurance premiums are influenced by your age and health condition, and the  costs are determined by your age and health status.

Can I get life insurance if I have a pre-existing medical condition?

Having a pre-existing medical condition may affect your eligibility for life insurance and it is possible to obtain one, but it may come with certain limitations or higher premiums.

How do I choose the right insurance company for my policy?

When choosing an insurance company for your policy, consider factors such as their financial stability, customer reviews and the coverage they offer to ensure you select the right one for your needs. It’s also a good idea to compare quotes from different providers to get the best deal.

What is a rider, and how can I use it to customize my policy?

A rider is an add-on to your insurance policy that allows you to customize your coverage based on your specific needs and can be  tailored to your insurance coverage to include additional features/protections, or exclude certain types of risks.

How do I designate beneficiaries for my life insurance policy? 

To designate beneficiaries for your life insurance policy, simply provide the full name and contact information of the person(s) you wish to name as beneficiary to your insurance company.

Are life insurance premiums tax-deductible?

Life insurance premiums are generally not tax-deductible. There are certain circumstances where life insurance premiums may be tax-deductible, but it is not common.

What happens if I can’t make my premium payments?

If you can’t make your premium payments, your insurance policy may lapse or be cancelled. This means you won’t be covered for any future claims.

Can I cancel my life insurance policy if I change my mind?

Yes, you can cancel your life insurance policy if you change your mind, but it may depend on the specific terms and conditions of your policy.

What is a grace period, and how does it work with my life insurance policy?

A grace period is a specific time frame during which a policyholder can make a payment on their life insurance policy without any penalty. If the payment is not made within the grace period, the policy may lapse or terminate.

How do I file a claim with my life insurance company?

To file a claim with your life insurance company, you will typically need to provide documentation such as a death certificate and policy information. Contact your insurance company to start the claims process.

What happens to my life insurance policy if I move to a different state or country?

Moving to a different state or country may impact your life insurance policy, as it may need to be adjusted or even replaced to meet the requirements of your new location. It’s best to call your insurance company or agent and seek their guidance on how to proceed.

Conclusion

Whether it’s term life or whole life insurance, you will need time and effort to understand the differences in their coverage, how certain factors set the motion directly to their premiums, and how viable the payout is to your beneficiaries upon the time of your passing.

Sources

Insurancereviews.org follows stringent sourcing guidelines by utilizing peer-reviewed studies, academic research institutions, and industry associations to ensure the reliability and accuracy of our content. We refrain from using tertiary references and prioritize primary sources. To learn more about our commitment to delivering up-to-date and accurate information, please refer to our editorial policy.

  1. investopedia.com/term-life-vs-whole-life-5075430 – April 2023
  2. https://www.nerdwallet.com/article/insurance/term-vs-whole-life-insurance – April 2023
  3. https://www.progressive.com/answers/term-vs-permanent-life/ – April 2023

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Evidence Checked

This piece of writing has been crafted using scientific evidence and has been composed and verified by our knowledgeable specialists team. Our group of certified nutritionists and dietitians endeavors to maintain impartiality, honesty, and to provide a comprehensive perspective on the issue at hand. Additionally, the article includes scientific citations, indicated by clickable links, which lead to peer-reviewed research papers.

Amber Benka
Amber Benka
Amber first started in insurance five years ago. She has had various roles in my career, ranging from customer service, policy servicing, writing policies, creating endorsements, running the customer worker’s comp billing, and even writing about insurance. In addition to being a full-time agent, she also writes insurance content as a hobby. Amber's license number is 826316. Agent ID: https://apps02.ins.pa.gov/producer/ilist3.asp Linkedin: https://www.linkedin.com/in/amber-lynn-benka-abb0a4268/ Facebook: https://www.facebook.com/abenka.valor

Amber first started in insurance five years ago. She has had various roles in my career, ranging from customer service, policy servicing, writing policies, creating endorsements, running the customer worker’s comp billing, and even writing about insurance. In addition to being a full-time agent, she also writes insurance content as a hobby. Amber's license number is 826316. Agent ID: https://apps02.ins.pa.gov/producer/ilist3.asp Linkedin: https://www.linkedin.com/in/amber-lynn-benka-abb0a4268/ Facebook: https://www.facebook.com/abenka.valor

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