Quick answer
Term life insurance and whole life insurance are the two main categories of life insurance. Term life provides coverage for a defined period (10, 15, 20, 25, 30, or 40 years) at the lowest possible cost per dollar of death benefit; it has no cash value and expires when the term ends. Whole life provides lifetime coverage with a fixed premium and accumulates cash value over time, but it costs 5 to 15 times more per dollar of death benefit than term. A healthy 35-year-old pays roughly $25 a month for $500,000 of 20-year term and $450 to $600 a month for the same $500,000 of whole life. Term life is the right choice for roughly 90 percent of buyers; whole life is the right choice for buyers with estate-planning needs, special-needs dependents, or business buy-sell agreements.
What Is Term Life Insurance?
Term life insurance is the more popular of the two and is purchased for a specific period of time, typically at 10, 20, or 30-year increments.
Term life works especially well for a single or married parent who wants money available for their children in the event they pass on while they are of school age. Depending on the parent’s age when purchasing the policy, the parent can select a time period that would last until their children are of adult age, graduate from college, or when their mortgage is paid off, for example.
A married couple with no children could purchase a term life policy that would extend until each other’s retirement benefits kick in. This insurance is best when a specific goal is in mind and the purchaser can take advantage of buying the policy when they are younger and in good health.
What Is Whole Life Insurance?
Whole life insurance is a type of life insurance that is meant to last your entire (whole) life. Unlike term (temporary) life insurance, it has no predefined end-of-policy date. As long as you pay your policy premium, you will remain insured.
Additionally, unlike term life insurance, whole life insurance builds cash value. This cash value is then, in turn, accessible in various ways, like a loan or it can even be used to pay the monthly policy premium.
So which is best?
It sounds like whole life insurance is less of a headache, right? No policy-end to worry about, or having to re-apply 10 or 20 years from now. It’s true, a whole life policy offers many benefits. But it’s also more expensive.
Is it worth the cost? Let’s compare the rates of the two types of life insurance next.
Cost Difference Between Whole and Term Life Insurance
It’s important to know that whole life insurance is significantly more expensive than term life insurance. That is mainly due to the policy duration and cash value, we’ll explore each below.
Monthly cost example of whole life insurance vs 20-year term life insurance
| Age | Coverage | Term life cost | Whole life cost |
|---|---|---|---|
| 20 | $100,000 | $12.78 | $46.13 |
| $250,000 | $20.25 | $88.32 | |
| 30 | $100,000 | $13.40 | $67.52 |
| $250,000 | $21.63 | $123.35 | |
| 40 | $100,000 | $17.81 | $104.86 |
| $250,000 | $30.65 | $179.11 | |
| 50 | $100,000 | $35.68 | $161.60 |
| $250,000 | $70.21 | $236.23 | |
| 60 | $100,000 | $91.20 | $264.82 |
| $250,000 | $189.49 | $390.41 |
These rates are calculated for a healthy male living in California.
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The table above shows a clear price difference between whole and term life insurance. When compared for the same coverage amount, whole life insurance typically costs around 3 to 4 times more than term life insurance.
Now that you know the difference in cost, let’s explore why whole life insurance is so much more expensive.
Whole Life Insurance Lasts Your Entire Life, Term Does Not
Whole life insurance is available at just about any age. And when you get whole life insurance, you’ll be insured for the remainder of your life - unless you choose to cancel it of course.
While whole life insurance costs more initially, it starts to balance itself out long-term. Let’s explain this with a real-life example.
Scenario 1 - Whole life insurance
Bob gets a $100,000 whole life insurance at age 30. He’ll be paying $67/month his entire life for this policy.
Let’s fast forward 20 years. Bob is now 50, and he has paid $16,080 in life insurance premiums. Since Bob never missed a payment, his policy is still in force.
Fast forward another 20 years, and 70-year-old Bob has now paid a total of $32,160 in life insurance. Unfortunately, Bob dies 20 years later at age 90. He’ll have paid a total of $48,240 in premiums, and his beneficiaries receive the $100,000 policy face amount.
Scenario 2 - Term life insurance
In this scenario, Bob gets a $100,000 term life insurance policy instead, with a 20-year term. The policy costs just $12 a month.
Now let’s fast forward 20 years. His $12/month policy has now cost a total of $2,880. But since Bob got a 20-year policy, his policy has now ended. 50 year-old Bob wants to keep $100,000 in life insurance, so he applies for a new 20-year term policy. He hasn’t had any serious health conditions and still doesn’t smoke. In that case, Bob could get a new 20-year policy for around $35/month.
Let’s fast forward another 20 years. 70-year-old Bob has now paid $2,880 + $8,400 in premiums. But, Bob’s second 20-year policy has now ended, so once again, he’s without life insurance.
At this point, Bob is still in good, average health. But, term life insurance is no longer an option at this age. A popular alternative for his age is final expense insurance (a type of whole life insurance). A $20,000 policy will cost him $148 per month.
Bob dies 20 years later. His final expense policy will have cost Bob $35,520 and will pay his beneficiaries $20,000.
Scenario conclusion
If Bob would have gotten whole life insurance at age 30, and paid up to age 90, he would have paid a total of $48,240 in life insurance, but his beneficiaries would also have received $100,000.
This isn’t including the cash value that Bob’s whole life insurance policy would have built, which he could have used to pay for the policy after a certain amount of time.
If Bob would have gotten term instead, renewed his term policy, and finally applied for a final expense policy, he would have paid a total of $46,800 in premiums ($2,880 + $8,400 + $35,520), but his beneficiaries only received $20,000.
Now, the opposite is true as well. If Bob would have died at age 49, he would have spent $15,276 on whole life insurance premiums, compared to $2,736 on a term life policy. His beneficiaries would have received $100,000 with either policy.
Whole Life Insurance Builds Cash Value, Term Life Insurance Does Not
So we’ve established that while whole life insurance is more expensive in the short-term, it could be less expensive in the long-term.
But that’s not the only benefit of whole life insurance. Most whole life insurance policies also build cash value.
How much cash value depends on the company. Some companies offer a minimum interest rate, like 2 or 3%. Additionally, you can see an increase if the company’s portfolio gans in value.
So Which Is Best? Term or Whole Life Insurance?
If you want life insurance for your entire life: Whole life insurance
As our example above shows, whole life insurance is more convenient, and it can be more cost-effective if you want life insurance for your entire life. Reapplying for term life insurance is an option, but at a certain point, you will no longer qualify for term.
If you have serious health conditions: Whole life insurance
There are different kinds of whole life insurance, not all of them build cash value, and some cost more than others. But if you have serious health conditions, like cancer, it’s likely you will only be able to qualify for a guaranteed issue policy, a type of whole life insurance.
If you want the lowest cost life insurance: Term life insurance
If permanent life insurance isn’t something you’re concerned about, term life insurance is far more affordable than whole life insurance. On average, term life insurance costs 4 to 5 times less for the same amount of coverage.
If you want life insurance when you need it most: Term life insurance
A lot of individuals only want life insurance for a specific stage during their life. For example, when starting a family. Having life insurance for your family will protect your loved ones from financial hardship if something were to happen to you. But, once your kids are out the door, your death will likely have less of a financial impact on your family.
