Buying life insurance now provides a financial safety net for your dependents later if you’re not around to take care of them. After you’re gone, your family can use the proceeds to cover funeral costs, mortgage payments, college tuition and other expenses.
There are two main types of life insurance:
Term life insurance is the easiest to understand and has the lowest prices. You can get term life insurance quotes online.
Permanent insurance is more complex and tends to cost more than term, but it offers additional benefits. Whole life is the most well-known and simplest form of permanent life insurance. Other kinds of permanent life insurance include universal, variable and variable universal.
Want to know more? Let’s take a closer look at term life versus whole life insurance.
In this article
Term life insurance explained
Term life insurance provides coverage for a certain time period. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.
You choose the term when you buy the policy. Common terms are 10, 20 or 30 years. With most policies, the payout, called the death benefit, and the cost, or premium, stay the same throughout the term.
When you shop for term life:
- Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early.
- Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.
Ideally, your family’s need for life insurance will end around the time the term expires: Your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net.
All of the best life insurance companies sell term life, so it’s easy to find rates.
Whole life insurance explained
Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly, tax-deferred, meaning you won’t pay taxes on its gains while they’re accumulating.
You can borrow money against the account or surrender the policy for the cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.
Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component.
Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:
- The premium remains the same for as long as you live
- The death benefit is guaranteed
- The cash value account grows at a guaranteed rate
Some whole life policies can also earn annual dividends, a portion of the insurer’s financial sur. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.
|Policy features||Term life insurance||Whole life insurance|
|Choice of policy length||✓|
|Provides lifelong coverage||✓|
|Premium generally stays the same||✓||✓|
|Life insurance payout amount is guaranteed||✓||✓|
|Accumulates cash value||✓|
|Might be eligible for annual dividends||✓|
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Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.
Below are annual price comparisons between term life and whole life insurance. We used 20-year and 30-year term life policies because no apples-to-apples comparison is possible for the length of term life to whole life.
|Person covered||Policy amount||Whole life||30-year term life||20-year term life|
|Annual premiums using an average of three lowest prices available in each category for healthy men and women. Source: Quotacy.|
|Male, age 30||$250,000||$2,403||$227||$152|
|Male, age 40||$250,000||$3,572||$343||$212|
|Male, age 50||$250,000||$5,548||$819||$473|
Choosing between term and whole life insurance
Term life is sufficient for most families who need life insurance, but whole life and other forms of permanent coverage can be useful in certain situations.
|Choose term life if you:||Choose whole life if you:|