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Man holds tiny model umbrella over stick figures representing a familyTerm life insurance offers coverage for a specific amount of time, while whole life insurance provides lifelong coverage and the potential for a cash value accumulation. When you pass away, your family can use the proceeds from both types of policies to pay for your funeral costs, handle mortgage payments or cover other financial obligations. Although both are designed to provide a financial safety net for your loved ones, there are a few key differences that set them apart. So, to see how they each stack up, here’s what you need to know about term vs whole life insurance. And if you need extra guidance determining how life insurance fits into your overall financial plan, consider enlisting the help of an expert financial advisor.

How Term Life Insurance Works

Term life insurance is a short-term financial safety net to protect those who rely on your income for support. Term life insurance policies are straightforward and simple to understand. You can purchase term life insurance for a specific amount of time, usually five, 10, 15, 20, 25 or 30 years.

Typically, you can purchase a large amount of term life insurance for a relatively small premium. Depending on your health, age and the amount of coverage you need, it’s possible to purchase a policy with a premium of a few hundred dollars. Some insurance companies will give you the option either to pay level premiums or gradual premiums that can increase over the term of the policy. It’s important to note that you may want to expect a rate increase if you renew your policy after its initial term.

Also, some term life insurance policies are convertible. This means that if you discover you need coverage for a longer period, you can convert your term policy to a whole life insurance policy. However, age limitations typically apply.

Keep in mind that once your policy expires, you will not get your money back unless you purchased a return premium rider when you first bought your policy.

How Whole Life Insurance Works

Couple discusses life insurance with an agentUnlike term life insurance, whole life insurance is a type of permanent life insurance. This means that the policy provides a death benefit throughout your entire life. If you continue making your fixed premium payments, your policy will remain in place. Whole life insurance policies also have a cash value component that grows tax-free throughout your life.

As you pay your premiums, a portion of your payment will go toward the cash value component of your policy. Once your policy accumulates enough cash, you can choose to borrow funds through a loan or make a withdrawal. Depending on the insurance company, rules and guidelines may vary for when and how you can access your cash value. An insurer may provide specific guidelines you must follow to avoid the reduction of the policy’s death benefit or create a tax burden.

Some whole life insurance policies may also allow policyholders to earn dividends, which pay you with the insurer’s profit. You can either take the dividends in cash, leave them in your account to grow interest, use them toward your premium payments. Additionally, you can use them to pay off your loans or buy extra coverage. However, dividends are not guaranteed.

While the cost of your policy depends on several factors including how much coverage you buy, whole life insurance tends to be more expensive than term life insurance.

Comparing Term vs. Whole Life Insurance

Understanding the differences between the two policy types is often confusing. Here is a breakdown of the key differences between both policies.

TERM LIFE WHOLE LIFE
Duration Predetermined (5, 10, 15, 20, 25 or 30 years) Entire life
Premium variations Typically stays the same Typically stays the same
Premium amount Lower Higher
Cash value Yes Yes
Eligible dividend payments No Yes

Term or Whole Insurance: Which Is Right for You?

Term life insurance is a good option for those who only need coverage for a certain amount of time. For example, if you’re raising children, you might want to purchase a policy to protect them until they graduate college. By purchasing a term policy, you can ensure your children receive the financial support they need even in your absence.

Term life insurance is also a more affordable option, which makes it more attractive to most people. Even if you think you may need some form of permanent coverage, you can start with a convertible term life insurance policy and convert it if you discover that you need coverage throughout your life. This way you could use the extra money you save on your premiums to invest your money and help it grow, which may help you accumulate enough money to provide a financial safety net for your family.

Term life is usually suitable for most families who need coverage. However, there are some instances where whole life insurance may make more sense. For example, if you have a child with special needs, a whole life insurance policy might be a better option. Since you can use the funds from your whole life insurance policy for a special needs trust and thus ensure your special needs child is taken care of long after you pass away.

A whole life policy may also make sense if you want to use your retirement savings and then have the policy pay for your funeral or other burial costs. Or, perhaps, you want to ensure your children receive equal distributions.

The Bottom Line 

Life insurance policyWhen it comes to term vs. whole life insurance, you’ll want what’s best for you. It helps to assess your current financial situation plus your overall financial plan and goals before deciding. If you’re still unsure of which policy is best for you after assessing your assets, you may want to speak with a financial advisor who can help you weigh out your options.

Insurance Tips

  • Knowing your insurance needs isn’t easy, but you can get help. Finding a financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
  • Term and whole life are not your only choices when it comes to life insurance. For example, whole life is only one type of what’s called permanent life insurance. There are several other types of permanent life insurance you should be aware of. Also, before making a decision, be sure to use a free calculator to assess how much you really need.

Photo credit: ©iStock.com/thodonal, ©iStock.com/Drazen Zigic, ©iStock.com/courtneyk

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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