Term and whole life insurance

These are the two most popular forms of coverage. Both can protect your loved ones with a lump sum, income tax-free death benefit payout if you pass away unexpectedly. However, there are significant differences you should know about before choosing term vs. whole life protection.

Term life insurance policies last for a set period, during which you'll pay premiums to the insurance company to maintain coverage. These policies typically have "level" premiums that remain the same throughout the term, so you don't have to worry about rising premiums. Coverage typically lasts between 10 and 30 years. If you pass away during the term, your beneficiaries will be paid a cash benefit. However, once the term ends, there's nothing left. And, if you want to extend coverage, you need to apply for a new term life insurance policy with rates that may be significantly higher because life insurance gets costlier with age. However, if you want permanent coverage, many term policies will let you convert to whole life coverage, at least for an initial period.

In contrast, whole life insurance is a form of permanent life insurance designed to provide life-long protection. (The other main type of permanent insurance is universal life insurance.) With a whole life policy, you pay a set monthly premium that never increases. A portion of that money is set aside and added to the policy's cash value, where it grows, tax-advantaged, over time. So, whole life policies not only provide a guaranteed death benefit to your beneficiaries but also a wealth-building asset – cash value that can be withdrawn or borrowed from while you're still alive.3 Whole life policies from a mutual life insurance company – like Guardian – may even pay out dividends to policyholders, because these companies are actually owned by their whole life policyholders.4 Dividends can enhance cash value growth or be used in other ways – and while they are not guaranteed, Guardian has paid dividends to policyholders every year since 1861. However, due to the added advantages of whole life coverage, these policies can be significantly more expensive than term insurance.

Term life insurance advantages and disadvantages

Pros Cons
  • It’s typically less expensive than a permanent policy.
  • It can provide a large death benefit at relatively affordably.
  • Easy to get quotes and apply for coverage online.
  • Certain policies can be converted to a permanent policy without undergoing another medical exam or underwriting - so future premiums will be based on your current health.
  • Coverage is temporary and will end once the term expires.
  • Can be expensive to purchase a new policy at the end of the term, as insurance costs typically increase with age.
  • If your health declines, you may not be able to get another policy after your term ends.
  • Term life does not have cash value that can be tapped into while you’re still alive.

Whole life insurance advantages and disadvantages

Pros Cons
  • Coverage is permanent, meaning your beneficiaries will receive an income tax-free death benefit regardless of when you pass away.
  • Premiums stay the same for life.
  • Builds tax-advantaged cash value
  • You can withdraw or take policy loans from your cash value to pay for expenses or supplement your retirement income.
  • Mutual insurers, like Guardian, may pay annual dividends to whole life policyholders, adding to your wealth.
  • Policies can be tailored to your needs with a variety of optional riders.6
  • Because of its added benefits, whole life is typically significantly more expensive than term life insurance. 
  • It's harder to get whole life insurance quotes online
  • Other types of permanent coverage, likeuniversal life, may offer more flexibility because they allow you to adjust your monthly premiums within a certain range to account for changing financial circumstances.5

How to get the right life insurance coverage for your needs

You should start by getting an idea of how much coverage you need. There are several rules of thumb, but generally speaking, you should consider having a death benefit amount that can provide income replacement for your salary and cover critical expenses like mortgage and education costs until your children are grown.

Typically, the best time to purchase life insurance is when you’re young. This is because younger people tend to be healthier and have a longer life expectancy, so life insurance companies generally offer them coverage at lower rates. This holds true whether you're buying term or whole life insurance. But whatever your age, it's easier to shop for and compare term life insurance quotes online; whole life policies (and other types of permanent coverage) are somewhat more complex and are typically tailored to each policyholder's needs, so they are best purchased with the help of a life insurance professional. If you have questions about what's best for you, it's worth talking with an experienced professional who will take the time to learn about your needs, answer your questions, and guide you to the right type of coverage – or coverages – for your financial strategy. If you don't have someone to discuss insurance with, Guardian can help you find a nearby financial professional who will take the time to learn about your situation and present you with options that fit your specific needs and concerns.

Frequently asked questions about life insurance advantages and disadvantages

What are the benefits of life insurance?

Life insurance has advantages and disadvantages depending on the type of policy, but it is a key source of financial protection that can provide many benefits. If you pass away, it can help replace the income you would have otherwise earned to support your family. The benefit can also be used to pay off mortgages, other significant debts, college, or other financial needs. Almost all life insurance benefits are paid out income tax-free, so it can help you pass on generational wealth. Also, permanent policies build cash value with tax benefits that help you build wealth, providing funds you can tap into for loans or withdrawals to pay for expenses or help supplement your retirement income.

What are the three main types of life insurance?

The three main types of life insurance are term, whole life, and universal life. With term life policies, you pay a premium for a defined term (e.g., 10, 20, or 30 years), and if you pass away during that time, the policy pays your beneficiaries receive a death benefit. But once the term is over, you no longer have coverage. By contrast, whole life and universal life policies provide permanent insurance protection that lasts your entire life. These permanent policies also build tax-advantaged cash value that can be accessed while you are still alive. The main difference is: whole life policies feature level premiums that stay the same for life; universal policies feature variable premiums that can be adjusted up or down within a specific range to account for changes in your financial situation.

What are the advantages and disadvantages of term, whole life, and universal life insurance?

Each kind of life insurance policy has advantages and disadvantages that you should weigh before you buy. Term life insurance is relatively affordable, but coverage is temporary, and policies don't have cash accounts that build value. Permanent whole and universal life policies generally cost more but can provide life-long protection and wealth-building cash value. Whole life offers more guarantees than universal life with premiums that never go up or down; universal life offers more flexibility because it features variable premiums – but if you pay the minimum for too long, it can impact the death benefit and even cause the policy to lapse.

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This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial professional and refer to your individual whole life policy illustration for more information.

3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

4 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

5 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

6 Riders may incur an additional cost or premium. Riders may not be available in all states.

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