What Is the Difference between Term and Whole Life Insurance?

What is the difference between term and whole life insurance? It all comes down to these three things: length of coverage, cash value, and cost. We’ll go over all of both of these points below to help you make the right choice for your family’s life insurance protection.

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Similarities between Term and Whole Life Insurance

We’ll go over the three main differences below: length of coverage, cash value growth, and cost.

But first, let’s start with what makes them alike: both policy types are essentially a contract with your life insurance provider. If you pass away during the policy’s coverage period, the insurer is contractually obligated to pay your beneficiary(ies) the full face value of that policy, almost always 100% income-tax free. Your payments are level, meaning they’re the same every time, whether you pay annually, semi-annually, or monthly.

Both policy types have the same application process, with either fully underwritten or non-medical underwriting. What does that mean?

Senior woman talking to a life insurance medical examiner

Fully underwritten: The insurer will pay for a medical examiner to come to your home or office and measure your height and weight. They’ll also collect a blood and urine sample. By using this data to get a better picture of your overall health, the insurer will decide on a rate (the price of your coverage).
Non-medical underwriting: In this case, the insurer won’t require a medical exam, but they will gather data on you to get a similar picture of your overall health and lifestyle. This includes medical records, prescription records, your driving record, and even your credit history. In most cases, skipping the medical exam will cost you a little more than full medical underwriting. For some of our client, it’s worth it! For others, especially those in good health, it’s less expensive to take the medical exam and reap those savings for the full length of the policy.

Okay, now that you know what you get with either policy type, let’s look at what makes term and whole life insurance so different.

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Term vs. Whole Life Insurance: Different Length of Coverage

What is the difference between term and whole life insurance? The most obvious answer is the length of your policy. Term life covers you for a particular term – a length of time you choose when you buy your policy. Term lengths can be as short as a one-year renewable term, or as long as 40 years. When the term expires, so does your coverage. If you pass away after the term ends, there is no longer any policy in force and no death benefit for your loved ones to claim. The idea is to choose the term that best fits the length of your financial obligations. This might be until the mortgage is paid off, until your kids reach age 18, or until you retire.

Happy parents with term life insurance sitting outside with their toddler

Whole life, on the other hand, is just what it sounds like: it covers you for the rest of your life. Whole life policies are guaranteed to pay out, as long as you keep them current with your payments. Most whole life policies are designed to “mature” when you reach age 100 or 120. All this means is that if you happen to still be alive when the policy matures, the insurance company will pay you the death benefit rather than waiting for you to pass away and then paying it to your beneficiary(ies). So although it’s possible to outlive your whole life policy, it’s not likely – and even if you do, the policy is still guaranteed to pay out.

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Term vs. Whole Life Insurance: One Has Cash Value, One Doesn’t

Woman holding a fan of cash, symbolizing the cash value component of whole life insurance

What is the difference between term and whole life insurance? Cash value is another important component of the answer. Whole life insurance comes with cash value, a component that’s specific to policies that last your entire life (called “permanent” policies). Cash value is an account attached to your policy that functions like a savings account. A part of every payment you make gets deposited into that account. It grows over time, tax-deferred, with both your payments and an amount of interest your insurer contributes. You are also allowed to over-fund your account by paying more than your regular payment amount, if you want to grow your cash value even faster.

In general, your cash value will grow faster when you’re young, since the cost of your coverage is cheaper. More of every premium payment will go into your cash value account. As you age, coverage gets more expensive and less of each payment will be deposited into your cash value account.

Whole life insurance’s cash value interest rate varies by policy and insurer. Most whole life policies pay a low, flat rate of interest (1-3%, usually). It’s not a lot, but it’s guaranteed, unlike the rates that come with other policy types (variable or indexed universal life, for example).

Term life does not have a cash value component.

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What Can You Do with Life Insurance Cash Value?

So…why consider cash value life insurance? Think of it as a financial asset, or like an enforced savings plan. It accumulates over time, as we mentioned. Later on, you can:

Withdraw from it. If you withdraw money from your cash value, it’s income-tax-free up to the amount of premium payments you’ve made over the life of the policy. Depending on the amount of money in your cash value account, a withdrawal may reduce the amount of money paid to your loved ones in the death benefit.
Borrow against it. You can take out a policy loan from your insurer for a small amount of interest. If you pay it back, you’ll stop accruing interest. If you don’t pay it back, you’ll keep accruing interest and the insurer will deduct the total amount you owe from the death benefit before they pay it to your loved ones.
Use it to buy more coverage (called “paid-up additions”). If you want additional coverage, you can buy paid-up additions with your cash value, which are like policies-within-a-policy. If, for example, you have $75,000 of cash value and want $50,000 more in coverage, you can use part of your cash value to add that new $50,000 policy with its own cash value, all within the umbrella of your original policy.
Pay your premiums with it. Most insurers will let you use your cash value to make your premium payments. The catch? It’s up to you to make sure there’s always enough cash value in your account to both pay the premium and maintain the minimum standard required by your insurer. If you can handle checking on your account every month, that’s great. If you’re a “set it and forget it” type, you may need to add reminders to your calendar to check your account and make sure you don’t accidentally lapse your coverage by draining the cash value.

➡️ Rather talk to a real person about whole life insurance and cash value? We’re here for you! Call us at (800) 823-4852 and we’ll answer all your questions. Or click the button below to start with a free term life quote!

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Term vs. Whole Life Insurance: Different Price Point

What is the difference between term and whole life insurance? Cost is a big part of the answer. Given that whole life insurance covers you for your entire life and contains cash value, it shouldn’t be a surprise that it costs more than a term life policy.

But how much more?

Multi-generational family with grandma, mom, and daughter using a laptop to get a quote for whole life insurance and term life insurance to compare costs

Expect to pay anywhere from 5 to 7 times as a term policy for a whole life policy. That number might not be as scary as you’d think, though. For example, if your term life quote was $30 per month, you could expect a whole life quote to run $150 per month and up, depending on the insurer and face value. Is that worth the cost? Only you can answer that question.

There are a lot of ways we can adjust coverage so it meets your needs and budget. While it’s never going to be less expensive to buy whole life coverage, you still have options. You could buy a lesser face value now, and use your cash value later to buy a paid-up addition, providing extra coverage for zero out-of-pocket cost later. Or you could take a policy loan or withdrawal later to reimburse yourself for the extra cost over and above a term life policy. It’s up to you!

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Which Type of Life Insurance Is Right for You?

What should you buy: term or whole life? That’s a question only you can answer. It depends on which factors are most important to you, as well as your family’s life insurance needs. Both policies provide protection, but at what cost? And for how long?

Here are some key questions to ask as you decide on a policy type:

Smiling parents and daughter in their living room, as the dad looks up life insurance quotes online

Are you on a tight budget? Term life is always going to be more affordable, no question. It may be better to get some coverage in place than go without.
Are you worried about outliving your term? Whole life is guaranteed to pay out no matter when you pass away, and that peace of mind may be worth the extra cost for you.
Are you interested in building a financial asset? Cash value is part of your financial portfolio. It’s an asset you can draw from in the future, whether that’s for retirement costs, unexpected expenses, or healthcare costs during retirement.

So…what is the difference between term and whole life insurance? Cost, policy length, and cash value – all important factors in your decision-making process. No matter what your decision is, we can help you get that coverage in place.

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