What Is The Difference Between Term And Whole Life Insurance Policies?

Shopping for life insurance can be a confusing experience. There are thousands of companies out there and various types of plans available to choose from. Words like “underwriting” and “cash value” are being thrown around, and you’re not really sure what they mean.

If you’re confused, you’re not alone! The average American isn’t taught this information in school…. most of us didn’t take “Life Insurance 101” our freshman year. Google probably has the answers you’re looking for somewhere, but it can be hard to find an unbiased source, and even harder to know what you need to know first. 

There’s a lot to know about life insurance, but a good place to start when you’re becoming a savvy consumer is understanding the difference between term and whole life insurance policies. When you know which one you want, you can narrow down about half of your options, making the search for the perfect policy much more manageable!

What is Term Life Insurance? 

Term life insurance is the most “pure” form of insurance out there. You pay a premium to an insurance company each month for a set amount of time — maybe 15 years, maybe 30 (plans vary). In exchange for you making this monthly payment on time, they promise a certain amount of coverage to your beneficiaries during the term if you pass away. 

What is Whole Life Insurance? 

When you have whole life insurance, also commonly referred to as permanent life insurance, you pay a monthly premium to an insurance company for your entire life. When you pass away, no matter how old you are, the coverage amount is paid out to your beneficiaries. 

Term vs. Whole Life Insurance: What’s the Difference?

Both term and whole life insurance will protect the people who depend on you if something happens. If you pass away unexpectedly, you can have peace of mind knowing that your family may not have to struggle financially or go into debt because they can no longer rely on your income or support.

Length of Coverage

Limited vs. Lifetime

The first difference between term and whole life insurance is in the definition. Term life plans expire, while whole life plans never do. Most term life plans last anywhere between 10 and 30 years, although Everyday Life offers plans that last for up to 40 years.

If you have a term life plan and you are still alive at the end of the term, you must either purchase new coverage or go without. Term life operates on the assumption that by the end of the term, you will either have less to insure (grown-up dependents, paid off debts) or have more savings built up to cover the loss of your income should your family need it. Whole life plans never expire, and the premiums will remain the same throughout the policy. 

Investment Component

Nonexistent vs. Complex

Another difference between term and whole life insurance is that whole life is decidedly more complicated because it comes with a cash value component. This means that every month, part of your premium is set aside for an investment purpose.

The insurance company will take that portion (which varies from plan to plan) and invest it in order to make you money. As the returns on that investment grow, you can take out loans from this cash value or use it to fund policy premiums. This is unique to whole life policies — term life plans do not have a cash value component. 

However, it is important to understand that you have no personal control over the investments made, and it will take several years for the cash value to build. There are conditions and additional fees that may apply when you borrow from your cash value.

For example, if you borrow more than you are able to pay back before you pass away, the amount you owe will be subtracted from the coverage amount paid to your beneficiaries. If you pass away and don’t use your cash value, it will likely be kept by the insurance company and not paid out to your loved ones.

Expense

Affordable vs. Expensive

The difference between term and whole life insurance that’s the deciding factor for most people is in price. Whole life is much more expensive. Some estimates say anywhere from five to 15 times more expensive than term life.

There are many reasons for this, but the cash value component is one of the reasons; you are paying for your insurance company to invest for you, rather than separating your insurance and investments, and that comes with a cost. Another reason why whole life insurance is more expensive is that all of a company’s policyholders will pass away, and they will have to pay out coverage. Term life companies may not have to pay out coverage if the policy holder survives the term.

The insurance company may get to keep the money that the policyholders are paying for, so those plans are cheaper. The average cost of term life insurance depends on many factors, such as your age and health, but overall these types of plans are more budget-friendly. 

Everyday Life’s Term Life Plans

Term life plans make the most sense for the average person because most people don’t need coverage for their entire life (even if they have special needs children or a complex financial situation). 

If you’ve decided that term life is the insurance type for you, the next step is finding out how much coverage you need.

We’ve created an objective, online Ultimate Life Insurance Calculator that will take your specific life situation into account and tell you how much coverage you should buy. We’ll even tell you if you don’t need any coverage at all! It takes less than two minutes to fill out online, and there’s no contact info required.

The Ultimate Life Insurance Calculator will give you a personalized term life plan recommendation. Everyday Life plans are a little different from regular term life plans. They are tailored to your unique needs and adapt over time to ensure that you are never overpaying for unnecessary coverage. Get your free quote now!