What’s the Difference Between Term and Whole Life Insurance?

Are you confused when it comes to deciding on the best type of life insurance to take out? It can be hard to figure out the best kind of life insurance for your needs. However, it can become even more confusing when you have to decide between term and whole life insurance. Even with these basic two types of life insurance, many variables can affect life insurance premiums and levels of cover. 

Making the right decision when it comes to the best type of life insurance for you is critical. Consider these two important factors first:

  • The financial needs of your dependents
  • Your own financial goals

Life insurance is necessary to give your spouse and other dependents a financial safety net in case of your premature death. 

Both term and whole life insurance have a “death benefit.” Only whole life insurance has an investment savings part that allows you to withdraw some cash later on. As its name implies, you are covered for your whole life, not just a fixed term. However, the premiums are more expensive. 

If you are thinking of buying life insurance coverage, which is best for you? Term life insurance or whole life insurance?

In this article, you will find out about the two basic types of life insurance. This information will help you make an informed decision based on your financial needs and requirements. 


What is Term Life Insurance?

Term life insurance is also called pure life insurance and provides coverage for a fixed term. In the event of your untimely death, a term life insurance policy pays a guaranteed “death benefit” to the beneficiaries. The money provided by term life insurance can be used to pay for funeral costs, clear debts, pay off a mortgage, or clear medical bills. 

Depending on the type of term life insurance, the fixed terms can range from 5 to 30 years. During the time the policyholder pays a fixed premium. If the term ends and the policyholder is still alive, there is no financial payout. To continue to be insured, the policyholder needs to take out a new policy. 

Term life insurance policies are generally low-risk for insurers. Because of this, premiums are lower and more affordable. 

There are also different types of term life insurance policies available. Let’s look at the most common ones. Knowing about the various options can help you choose the best type of life insurance.

Level term policy

Level term is the most common type of term life insurance. The policyholder pays a fixed premium for the duration of the plan. This option is suitable for asset management at a low cost.

Renewable or convertible insurance

Some types of term life insurance offer the possibility to renew the policy at the end of the term. Insurers rarely offer guaranteed renewable options. A standard option is to convert the policy into whole life insurance. However, this will result in having to pay higher premiums to continue the insurance cover. 

Mortgage life insurance

As its name implies, mortgage life insurance guarantees that the insurer pays off the full amount of the mortgage if you die. Usually, premiums stay the same, but the value of the policy declines as the value of the mortgage reduces. Mortgage life insurance is a type of decreasing term insurance.

Annual renewable term insurance

This type of insurance policy is in force for a year. It offers a guarantee of insurability for a set number of years. The premiums usually increase yearly as the policyholder ages.

What is Whole Life Insurance?

Whole life insurance policies are in force for the entire life of the policyholder, not just a fixed term. This type of life insurance includes a “death benefit” that is paid out to beneficiaries in the event of death. The whole life insurance payout in the event of death is the same as for term life insurance.

Whole life insurance also includes a savings aspect to it where a cash value grows over time, also giving a “living benefit.” The policyholder can also reinvest any dividends to increase the cash value of the policy. Taking out whole life insurance policies also helps with estate planning. 

It is also essential to know about some of the different types of whole life insurance. This can help make an informed choice if you want to meet long-term financial goals. 

Participating whole life insurance

This type of permanent insurance policy pays you dividends based on the profits of the insurance company. You can receive the cash value of these, reinvest in your insurance policy to increase the cash value, or get paid the interest on them. 

Non-participating whole life insurance

Non-participating permanent life insurance offers guarantees that your policy slowly accumulates its cash value. It is possible to borrow against the cash value; however, you will not receive dividends.

Compared to participating life insurance, non-participating policies tend to have lower premiums. 

Term and Whole Life Insurance: Key Differences

How can you choose between taking out term life insurance or whole life insurance? 

Term life assurance is the most affordable life insurance option for many people. This is a good choice to ensure your family’s financial stability if you were to die early. Usually, by the time the term has ended, your home is paid for and children are living their own life. In your later years, you will usually have fewer financial obligations and less need for life insurance. 

Choose a term life insurance policy if you want affordable life insurance coverage. If you think you may want whole life insurance later in life, make sure that the plan has a convertible clause. 

Whole life insurance is a good choice if you want to leave money or an inheritance for your heirs. This type of life insurance can also be used to pay estate taxes or funeral costs if you decide to spend your savings during retirement. 

Term and Whole Life Insurance Summary and Conclusion

In all cases, life insurance provides a financial safety net for your loved ones if the unthinkable should happen. If you have specific financial needs and goals, it is always best to speak to a financial advisor. In many cases, term life insurance is the cheapest and most affordable optionHowever, if your family may benefit better if you take up whole life insurance.