Life
Term and whole life insurance, side by side
How term and whole life insurance work, how they differ, and who each one tends to fit, in plain words.
Short answer
Term life lasts for a set number of years, like until your kids are grown. It can pay out if you die during that time, but not after. Whole life is meant to last your whole life and builds cash value, a kind of savings inside the policy, so it usually costs more for the same payout.
How does term life work?
Term life is the simpler of the two. You pick the payout amount and how many years it lasts. That stretch of years is called the term. If you die during the term, the people you named can get the payout. They’re called your beneficiaries.
Say you have two young kids and a mortgage. You buy a $500,000 policy that lasts until your youngest is out of college. If you die partway through and the policy is still in force, your family could get the $500,000 to help with the house, the bills, and school. If you’re still alive when the term ends, the coverage stops, and usually nothing is paid out.
That last part bugs some people. But it works like your car insurance. You don’t get money back for a year with no crash, and you still had the coverage you paid for.
Many term policies keep the same price for the whole term. When the term ends, some let you keep going, often at a much higher price. Some also let you switch to a lifelong policy without a new medical exam if you do it in time. It depends on the policy.
How does whole life work?
Whole life is a kind of permanent life insurance. As long as you keep paying, it’s meant to last your whole life. So it can pay out whenever you die, not just during a set stretch of years. The price usually stays the same over the years, too.
It also builds cash value. Part of what you pay goes into an account inside the policy, and it builds up over time under the policy’s rules. You may be able to borrow against it. If you cancel the policy, you may get some of it back, minus any fees.
Cash value isn’t the same as a bank account. In the early years it often builds slowly. And money you borrow or take out can shrink the payout.
Say you have a $100,000 whole life policy. Years in, you borrow $10,000 against the cash value and never pay it back. When you die, the payout to your family would usually be cut by the loan plus any interest. So they’d get less than $90,000.
How cash value is taxed depends on your own situation. Ask a tax professional before you count on it for anything.
Term and whole life, side by side
| Question | Term life | Whole life |
|---|---|---|
| How long does it last? | A set number of years | Your whole life, as long as you keep paying |
| When can it pay out? | Only if you die during the term | Whenever you die |
| What does it cost for the same payout? | Usually less | Usually more |
| Does the price change? | Often stays the same for the term, then can jump if you renew | Usually stays the same |
| Does it build cash value? | No | Yes, inside the policy |
| What if you stop paying? | Coverage ends | It depends on the policy. You may get some cash value back |
| What’s its main job? | Covering the years people count on your income | Covering needs that last your whole life |
Who does each one tend to fit?
Neither type is better. They do different jobs, so the right one depends on what you need the money to do.
Term life often fits when
- Your family would need your income for a certain number of years.
- You want the biggest payout you can get for the price.
- Your big money worries have an end date, like the last house payment or the last year of college.
Say you’re newly married with a baby on the way. A term policy that lasts until your child is grown can cover the years your family leans on your paycheck the most.
Whole life often fits when
- You want coverage that doesn’t run out, as long as you keep paying.
- You want to leave money for final costs, like a funeral, or for someone who will always need help.
- You like the idea of cash value and can keep up with a higher price for years.
Say you’re close to retirement and your kids are grown. You don’t need a big payout anymore. But you want to make sure your funeral and last bills won’t fall on them. A smaller whole life policy can cover that no matter when you die.
Note
You don’t have to pick just one. Some people carry a small whole life policy for lifelong needs and a larger term policy for the years their family depends on them most.
Before you choose, ask yourself a few questions. How many years would your family need your income? Could you keep paying the price in a lean year? Your age and health when you apply affect the price of both types, so it can help to look sooner rather than later.