Whole vs. Term Life Insurance – Which is Better?

Everyone needs life insurance. They are two basic types of life insurance ? term life insurance and whole life insurance. The whole vs. term life insurance debate has been going on for decades. Some want to believe that one has a clear advantage over the other, but I think it all depends on what it is you’re looking for your life insurance to do as well as your life’s circumstances.

Term life insurance basics

Term life insurance is exactly what the name implies, it’s insurance that will cover you for a specific term. That term can be anywhere from five years to 20 years. During that time your premium will generally stay the same. At the end of the term you may be offered the opportunity to renew the term at a higher premium.

Term life insurance is pure life insurance. That is to say that it performs no other function. There is no investment provision, no cash value, no dividends paid out, and no loan provision. This, plus the fact that it covers you for a limited term, is why it’s so much less expensive than whole life insurance.

Whole life insurance basics

Term VS. Whole Life Insurance - Which is Better?
Term VS. Whole Life Insurance – Which is Better?

Whole life insurance on the other hand, can be thought of as insurance plus. It’s sometimes referred to as permanent insurance because once it’s in effect it cannot be canceled except for nonpayment of premiums. You can take a whole life insurance policy when you’re 18 years old and keep it for the rest of your life.

But whole life insurance is a lot more than just life insurance coverage. You pay a much higher premium for it and in exchange for that premium you get several additional features.

While you’re making the premium payments a portion of your payment is going into the cash value of the policy. It will then be invested, typically in mutual funds managed by the insurance company. As the investment value of the account rises you will be able to borrow against that cash value. And if held long enough the policy could accumulate enough funds to become a significant part of your retirement plan.

What factors might affect your choice?


One of the problems with whole life insurance is that the face amount of the policy ? the death benefit ? remains the same for the life of the policy. What this means is that the $100,000 policy you took at age 25 will still be $100,000 when you’re 50 or 75. The problem with that is that $100,000 at 50 will not have the same value that it did when you were 25.

Over time, inflation drives the cost of just about everything higher. It’s not inconceivable that a $100,000 policy purchased 25 years ago might be worth only about $30,000 or $40,000 today. That will force you to purchase more insurance, but the problem with that is that as you get older the insurance coverage becomes more expensive.

Since term life insurance is cheaper, you can always purchase additional coverage at a later date. It will also be more expensive than it would’ve been when you were younger, but you will not have the added expense of the original whole life insurance policy.

Changing needs

Apart from inflation, the need for life insurance will change over time. For example, the birth of a child will create the need for more coverage. The purchase of a home with a mortgage will also require additional coverage. You will need the ability to add relatively low-cost insurance at different times in your life.

Term insurance policies are not only less expensive than whole life, but they also tend to be more flexible. For example, you may only need additional insurance for the birth of the child for about 20 years. For a mortgage, you may only need the additional insurance for 15 to 30 years. Term insurance fits well with such needs. You can take an extra term policy for the period of time the extra coverage is needed, then let it go when it’s not.

Cash value/investment provision

An advantage that whole life insurance policies have that term policies never will is the investment feature. Whole life insurance policies build up investment- and cash-values for as long as you hold them. Term life insurance policies offered none of this.

From an investment standpoint, whole life insurance policies are far from the best deals in town. You would be better off buying a term life insurance policy and investing your money in a no-load index fund instead. But for the person who just can’t save and invest money, a whole life insurance policy is far better than no investment plan at all.

Your overall financial situation

One of the biggest problems with life insurance of any kind is that the greatest need for coverage is usually when you can least afford it. Typically, the people who most need the greatest amount of life insurance are young parents with children. They have to maintain a sufficient amount of coverage to provide for very young children for the next 20 years or so. They may also need coverage for the pay off of a mortgage that will never have a higher balance than it does right now. That is a lot of contingencies to prepare for!

But it gets worse. This is also the point in life when people can generally least afford to pay for life insurance. That makes a very strong case for using term life insurance. Term offers the best combination of high coverage and low premiums. For most young families, term life insurance will be all that they can afford.

Which do you favor when it comes to life insurance – term or whole life?

( Photo from Flickr by Ralph Hockens )

11 Responses to Whole vs. Term Life Insurance – Which is Better?

  1. A good mix of the two is usually best – long-term and short-term, stability and flexibility.

  2. Hi David–Yes, a whole life insurance policy as a permanent base, supplemented by term riders to cover specific, temporary needs.

  3. Whole term life insurance is more expensive the term life insurance. Term insurance coverage may be the least expensive, easiest kind of life insurance coverage that you can buy.

  4. HI Susan–That’s true, which is why most people go for term insurance. Whole life isn’t without its virtues, but term will work better for most people.

  5. I agree term life is much cheaper and the fact that it only last for so long but another option to consider is a return of premium of rider that would allow someone to get all the benefits of a cheaper policy but also pay them back all the money they put in minus any rider fees, and extra health related cost once the term period is up.

    This option is a great way for people to get the best of both worlds, the only down side is the money won’t be invested towards a cash value account and earn any type of interest rate.

  6. The typical profile of someone who should own term life insurance is a family breadwinner who has minimal savings. That is, by far, most people.

    Advantages of Term Life Insurance
    – Generally lower cost than permanent insurance.
    – Offers higher coverage at a more affordable price.
    – Gives you the most coverage for the lowest cost – up to 30 years.
    – Ideal for younger families when the need for protection is greatest.

    Choose Term Life Insurance for covering specific needs that will disappear with time, such as:
    – Income replacement
    – Financial security for dependents
    – Mortgage protection
    – College funding
    – Final/burial expenses

  7. We can do without the sales pitch so I deleted the last line in your comment and your backlink. The comment however was excellent which is why it’s still here.

  8. Kevin, et al,
    Some time ago a few insurance carriers got busted big-time by including “annuities” in the whole life programs, touted as “savings programs.” Problem was when the insureds tried to withdraw the “savings” they ran afoul of the restrictions on the “annuities.” Be very careful if the whole life program you are considering offers anything other than death/burial benefits.

  9. Hi Bill – That’s another compelling reason to go with term. Investment life insurance is not only costly (fees, etc.) but also complicated. We all need less of that in life.

  10. I agree with David above. Usually a mix of the two is best. It also pays to take a look at your insurance coverage every 2-3 years to make adjustments as you life changes (kids, jobs, debt levels, etc).

  11. Hi Derek – I completely agree with you on reviewing your coverage every 2-3 years. It’s amazing how much can change in just a few short years. Your income may be higher, your obligations may be greater – or lower – and eventually you may even be largely self-insured.

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