young couple giving their children piggy back rides through a field

Your family comes first, so you want to make sure you protect them with the right type of life insurance. But you may not know which one to pick. It can be a little easier by first knowing that there are two main types of life insurance: term life and permanent life, with whole life being a popular type of permanent insurance. The next thing you want to do is understand the difference between whole life vs term life definitions. By learning the difference, you can better decide what’s best for your needs.

What Is the Difference Between Whole Life vs Term Life Insurance?

The main difference is that term insurance provides temporary coverage for a specific period of time while whole life provides permanent coverage for your entire life. With term insurance, a death benefit is the only feature. But whole life policies combine both a death benefit and a savings feature. Both types of life insurance have different pros and cons.

An advantage in getting term insurance is it’s often cheaper because it doesn’t include the additional benefit of having a savings account. The downside is that at the end of the term, the policy will have no value.

The major advantage with whole life insurance is you can invest in, borrow against, or withdraw money from the policy while you’re still alive. This money comes from the cash value that the policy builds over time. The drawback is it usually takes a long time to build cash value for most policies, usually 8 to 10 years as mentioned in a Kiplinger Magazine article.

Let’s look at more differences on term vs whole life insurance in this comparison chart.

Term Life Whole Life
Basic type of life insurance More complex type of life insurance
Maximum term policy sold is usually a 30-year plan No limit on the amount of years you can purchase since coverage lasts for a lifetime, as long as premiums are paid
Death benefit is paid to beneficiaries only if you die with an active policy—e.g. If you have a 20-year policy, a death benefit is paid if you die during those 20 years or your policy has been renewed after 20 years and is still active Death benefit is paid regardless of when you die, as long as the policy is active
Cost starts out low, but may become expensive later in life—e.g. If the term ends at age 55 and you renew, it may be expensive since you’re older Cost starts out high but may get lower over the life of the policy
remiums for most plans remain the same only for the term—increases when you renew Premiums for the most common type of plan stays the same for the life of the policy
Typically provides more insurance protection per dollar Usually provides less insurance protection per dollar in the early years of the policy
Death benefit can stay the same, increase, or decrease depending on the type of plan Death benefit typically remains fixed as long as the policy is in force

Understanding Term Insurance

Although term insurance can generally fit the needs of most people, it’s important to understand why and who you should get it as well as how different term plans compare. This can help you decide how long you need insurance protection and what type of plan would be best for you and your family’s needs. Term plans can provide coverage for as little as one year or up to 30 years. In most cases, a medical exam is required to get a policy.

Why Get a Term Plan?

A term plan is designed to cover short-term needs. This is an important fact to remember when understanding a whole life vs term life definition. A primary example of this is needing money that could replace your income during the child raising years to cover major expenses like your kids’ college education or to pay down a mortgage. Longer term plans like a 20-year or 30-year plan are usually a good fit in these situations.

You can also get a term life policy to cover other short-term needs, such as a car loan, student loans, credit card debts, and medical bills you may leave behind. If you estimate it could take at least five years to pay off these debts, then a 5-year or 10-year policy may be enough for your beneficiary to cover these expenses after you’re gone.

Another reason why you may want to get a term plan is for its convertibility feature. This means that your term policy can be set to convert to permanent insurance when the term ends. This can be a great way to get affordable insurance for the years you need it most, but still be able to get lifetime protection with a policy that builds cash value.

Who Should Get Term Life Coverage?

Term coverage is most suited for young individuals and persons with growing children. Since term plans are usually much cheaper than permanent insurance, those who are just starting out in life and haven’t reached their peak income-potential can find this type of coverage the best fit for their budget.

For example, a 30-year-old female with a $250,000 level term policy could pay about $150 per year in premiums—that’s just $12.50 every month. For a healthy 35-year-old male with a 20-year term, a $500,000 policy could cost around $430 annually—this comes out to about $36 a month.

To help you get a picture of how the cost compares to other things you spend money on, let’s say you buy a large cup of coffee at Starbucks five days a week, which on average, cost $3 .65. This would add up to $18.25 in just a week, and be almost $75 in one month. When you look at things this way, you realize that getting a term life policy could cost you less per day than one cup of coffee. You can better estimate your term life coverage needs by using a life insurance calculator.

7 young adults sitting on a bench togetherLet’s compare the difference between term and whole life insurance policies as it relates to who term insurance is most suitable for:

Young singles with no dependents: you typically don’t need life insurance if no one depends on you for financial support. But you may still want to have a policy if certain situations apply. For example, if you have large sums of debt for which a family member is the cosigner, he or she would become responsible for making payments if you passed away. Also, you may need insurance to help cover your burial costs if you expect that this expense would be a financial burden for your family. According to Investopedia, an inexpensive type of life insurance, called final expense, is best suited for singles without dependents. You can find a policy to fit your needs with a cheap term life insurance plan.

Young married couples and those with children: if you’re a newlywed without kids or are married and just starting a family, chances are you recently bought a house or will be getting one soon. This is a major expense you will be paying probably for the next 30 years. If you or your spouse were to suddenly pass away, it may be difficult for your surviving spouse to continue mortgage payments and meet daily living expenses on one income. This would be an even bigger financial burden if the breadwinner dies and the other spouse doesn’t work. If you have small children, this is also the time when you need the most income replacement from a life policy that could support your family until your children grow up, should you no longer be around. When you compare term vs permanent life insurance, a term plan allows you to get more coverage at a lower cost.

For example, a nonsmoking 35-year-old male who buys a level premium 20-year policy with a death benefit of $300,000 could pay an annual premium as low as $370. If he gets a permanent policy with the same death benefit amount, he could pay between $6,400 and $7,700 a year in premiums.

Single-parents: raising a family on your own can be challenging. Not to mention all the expenses you have to meet on just one income. According to CNN Money , the average cost to raise a child to college-age is $245,000. If you were no longer around, it would take a lot of money to replace your income until your children become adults. Considering that most single-parents are mothers and the average wage for single-mothers is $36,780 (as of 2014) , term insurance is often the best option in getting low-cost life insurance.

Business owners who want to fund a buy-sell agreement : a buy-sell agreement is when business partners make a prearranged deal to buy out the interests of a deceased partner or one who has left the company. With life insurance, each partner would get a policy and name the other as the beneficiary. When one partner dies, the other would use the death benefit to buy out the deceased interests. Term insurance is usually a good option for this situation because it’s more affordable and offers more flexibility in case a business needs to change the benefit amount periodically.

While there is a place for buy-sell agreements, most businesses do not have the cash flow or profit to get the amount of coverage needed for whole life insurance. Most buy-sell agreements are funded with term insurance for two reasons: cost and changing needs. A business’ financial need will likely change every few years, and it is easier to simply replace a term policy in order to meet the most recent need.

Comparing Different Term Plans

Looking at the types of term plans available can also help you understand the differences between a whole life vs term life definition. Term life insurance policies come in two basic flavors : annual renewable term and level premium term. Both types of plans offer renewal based on making payments on time, not on your current health. So you can extend your coverage without answering health questions or taking a medical exam. Both types of life insurance have a maximum issue age. The maximum issue age for enrolling in a policy is usually 80.

A major difference between the two plans is that annual renewable term policies are very rare, so they’re not available from most insurance companies. This is because it provides very little life insurance protection for families. Additionally, these plans are usually offered through state insurance departments as a way for businesses to meet their life insurance needs. Level premium term insurance is what the majority of insurers provide to individual consumers. Rates on term insurance in general has hit an all-time low , so you may do better with getting longer insurance protection with a level premium term policy.

Let’s go over how these two term plans compare.

Annual Renewable Term (ART) Level Premium Term (LPT)
Provides coverage for one year at a time, but is rarely offered Provides longer terms, usually 5, 10, 15, 20, 25, or 30 years—20-year most common
Premium increases every year you renew Premium stays the same for a set period of time—can be for the entire policy or only for a part of the policy
Premiums usually start out lower, but could cost more than LPT policies if renewed every year for a long time Premiums may be a little higher than ART policies to start, but usually gets lower toward the end of the policy

Understanding Whole Life Insurance

The most common type of whole life insurance is ordinary level premium whole life, often called ‘ordinary life’. Other names for this type of coverage include traditional whole life and straight life. One of the advantages of whole life insurance is that all policy types provide guaranteed cash value on a tax-deferred basis , making it an attractive option when you compare whole life vs term life insurance. Tax deferred means you don’t pay taxes for every year the cash value increases, only when you withdraw money from the policy.

In exchange for the permanent coverage and cash value features these policies provide, you agree to pay the insurance company scheduled premium payments practically for the rest of your life, which is usually up to age 100. But depending on the type of whole life policy, you could have a shorter term for premium payments. A life insurance calculator could help you estimate your whole life insurance coverage needs.

Why Get Whole Life Insurance?

Besides the fact that you get insurance for life, one of the main reasons to get whole life coverage is to leave a legacy. The death benefit from any life insurance policy can give your beneficiaries a financial advantage. Since whole life policies build cash value, there is more opportunity to transfer wealth to your loved ones. Or maybe you’re big on giving back—a whole life policy can also be used to set up a charity in your name, leaving behind a lasting legacy.

Senior executive meeting with a life insurance agent to discuss whole life vs term life definitionsWho Should Get a Whole Life Policy?

Anyone who can afford it can apply for a whole life insurance policy. Younger adults who would rather lock-in an affordable level premium because of their age can take advantage of this type of coverage. Those who want to build cash value to use in retirement years can also benefit from this policy. But just as how term insurance is more suitable for some, a whole life policy may also be a better fit for certain groups of people.

Let’s look at who should buy whole life insurance:

High income-earners: when comparing a whole life vs term life definition and who should get what, you want to remember that the higher cost means having a higher income. Although young people can earn high wages, income typically peaks the more a person advances in their career and then drops down after retirement. So 40s and 50s is perhaps the age range when many people reach their highest incomes. This may make sense since term insurance is usually more suitable for younger persons, typically those in their 20s and 30s.

Those who you need more liquid assets: an asset that is liquid means it can be converted to cash fairly easy. Permanent insurance provides this benefit since you can withdraw or borrow from the cash value. According to Kiplinger Magazine, life insurance that provides a cash value can be a good fit for those who have used up all their retirement, 401K, or other tax-sheltered accounts. People who have illiquid estates that would be subject to high estate taxes are also good candidates for whole life insurance because the money from the policy could cover these costs.

Retirees who need more supplemental income: if you retired at 65 for example, and expect that your retirement savings may run out in 10 to 15 years, a whole life policy may work for you. Since it does take 10 years on average to build cash value, you should be able to get money from the policy by the time you’re 75. Another instance when retirees should get life insurance that provides permanent coverage is if a spouse’s pension doesn’t provide a death benefit to the surviving spouse, as mentioned in a Kiplinger Magazine article.

Comparing Whole Life Insurance Types

Besides ordinary life, there are five other basic types of whole life policies: nonparticipating, participating, limited payment, single premium, and intermediate premium. There are pros and cons for each, and not all insurance companies offer each type of policy .

Let’s go over what each type of whole life insurance has to offer:

Advantages Disadvantages
Ordinary Whole Life Level premiums for the life of the policy; the insurance company puts the excess premiums paid in the early years in investment accounts to build the policy’s cash value Higher premiums than term life plans
Nonparticipating Whole Life The premium and the face amount (the value of the policy) are level for life; offers a lower out-of-pocket cost Doesn’t pay dividends
Participating Whole Life Pays dividends based on the insurance company’s excess earnings in investments; can use dividends to buy more coverage, reduce premium payments, or withdraw as cash Dividends are not guaranteed
Limited Payment Whole Life Allows you to pay premiums for a limited time, such as for 10 or 20 years Premiums are higher since it’s spread over a shorter period of time
Single Premium Whole Life Policy is fully paid up at the time of purchase; provides immediate cash and loan value Have to pay the entire premium at once, which can be a large amount of money
Intermediate Premium Whole Life Policy is issued at a current premium rate which could stay the same; premiums guaranteed not to exceed a maximum rate Premiums can change based on the insurance company’s estimates on expense costs, mortality, and investment earnings

Choosing between Permanent versus Term Life Insurance

There is no one size fits all when comes to choosing between permanent and temporary life coverage. It really comes down to your needs and budget. Here are some tips on how to decide which type of life insurance is right for you:

  • Determine your priorities—is income replacement, money for your funeral expenses, or retirement savings most important at this time in your life?
  • Use online life insurance calculators to estimate your needs
  • Do your research by comparing rates and policy features from different insurance companies

To get more answers on whole life vs term life definitions, speak to one of our knowledgeable agents. Our licensed agents are here to help guide you towards the life insurance policy that’s right for you. Don’t delay in getting the coverage that could help provide your loved ones with financial security. Contact a HealthMarkets agent near you.


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