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Term vs. whole life insurance: Which is right for you?

Understand the distinctions between insurance policies so you can make the best decision for your needs.
Guardian Life Insurance of America
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Term vs. Whole Life Insurance

If phrases like term, whole life, and permanent insurance all blend together for you, you're not alone. While you likely know that life insurance will pay a sum of money to your beneficiaries if you pass away, you may not be as clear on term life insurance benefits vs. whole life insurance, which is actually a type of permanent life insurance. This article can help you find the best type of life insurance for your needs by answering some key questions about the differences between term vs. whole life insurance:

  • What is term life insurance?

  • What is whole life insurance?

  • What are the pros and cons of each kind of policy?

  • What should you consider before buying a policy?

What is term life insurance?

A term life insurance policy provides coverage for a specific term or period of time, typically between 10 and 30 years. It is sometimes called "pure life insurance" because, unlike whole life insurance, this policy has no cash value component—it's designed purely to give your beneficiaries a payout if you pass away during the term.

If you get a term policy to help protect your family, you should consider whether your family's need for life insurance will change before the term expires. For example, will your kids be grown up and on their own? Will your house be paid off? Will there still be some money that can provide stability for the surviving spouse?

Use our term life insurance cost calculator to estimate your monthly premiums.

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What is whole life insurance?

Whole life is the simplest form of a permanent life insurance policy that provides coverage that lasts your entire life, as long as premiums are paid.1 Unlike term life, it’s not a "pure life insurance" product because it includes a cash value component.2 A policy has cash value when a portion of your premium dollars can grow over time on a tax-deferred basis, so you don’t pay taxes on the gains.3

A policy’s cash value account provides many benefits that you can access while you’re still alive. It takes a few years for the money to grow into a useful amount. When it does, you can borrow money against your policy’s cash value in the form of loans or withdrawals,4 use it to pay your premiums, or even surrender it for cash to help supplement your retirement income.

While there are other types of permanent life insurance, whole life is the simplest to understand:

  • The premium remains the same for life

  • The policy’s death benefit is guaranteed

  • The cash value grows at a guaranteed rate

Note that with mutual life insurance companies, such as Guardian, whole life policies can also earn annual dividends (a portion of the life insurance company’s profits) that can increase your cash value and provide other benefits. While not guaranteed, Guardian has paid dividends to participating individual life policyholders every year since 1868.5

Key differences between term and whole life insurance

There are several significant differences between term and whole life insurance. The most significant is that while both pay a death benefit to your beneficiaries, term life only covers you for a set period. In contrast, whole life offers permanent (lifelong) coverage as long as you pay premiums. Plus, whole life features a cash value component that accumulates funds over time.

The added value of whole life insurance and the certainty that the insurer will eventually have to pay a death benefit usually means that life insurance costs for whole life are higher than for a term policy.

Here are some of the other features and differences that can help you decide which type of policy is best for your personal finance needs:

Policy feature

Term life insurance

Whole life insurance

Initial premium

Typically lower than whole insurance

Typically higher than term insurance

Premium over time

May remain the same or increase over time

Guaranteed to remain the same

Permanent coverage

No

Yes

Length of coverage

Typically, 10-30 years. If you buy through work, coverage can be up to a termination age

Lifetime coverage (as long as premium payments are made)

Health exam required

In most cases, but depends on the amount taken out

Yes

Cash value

No

Yes – accumulates over time

Eligible for company dividends

No

Yes – depending on the company

Ability to withdraw cash value during the life of the policy

No cash value

Yes – withdrawals and loans are allowed (but if unrepaid, this will diminish the death benefit)

Guaranteed death benefit

Yes

Yes

Used for estate planning

Not typically

Yes

Accelerated death benefit

Yes

Yes

What to consider before you buy a whole or term life policy

Every person is unique, and the decision to buy a whole vs. a term policy should be guided by your specific situation and the things that matter to you, including:

Age and health

  • Your age (The younger you are, the less expensive the policy, generally speaking)

  • Your health (The better your health prospects, the less expensive the policy, generally speaking)

  • Your children’s ages (Once they are grown and on their own, they may be able to secure their own income)

  • Long-term health expenses and the costs of serious illness (Influences the amount of insurance you need)

Financial obligations

  • Your family’s financial goals

  • The amount of your mortgage and other debts

  • Your plans for retirement

  • College plans for your children

  • How you will pay for funeral expenses

Estate planning

  • Estate planning and tax ramifications

  • If you will set up a trust as part of your will

  • If you want to leave part of your estate to charity

Existing insurance policies

  • If you have existing life insurance, perhaps through your employer

There may be a considerable cost difference between a term policy and a whole life policy at first, but remember: whole life premiums stay the same over time, and term coverage becomes increasingly more expensive with every renewal. When you consider all the benefits that a whole policy can provide over the course of your life – and the certainty of an eventual payout – you may feel it’s a better overall value, depending on your situation.

Key pros and cons of term vs whole life insurance

Type of Policy

Term

Whole

Premiums

Pro

Initially lower compared to whole life

Remains same over time

Con

Can rise substantially at renewal

More expensive than term over the life of the policy

Coverage term

Pro

Customizable, typically 10 – 30 years; can often convert to a whole life policy later

Protection for life (as long as you pay premiums)

Con

May need to renew policy at a higher rate when term ends

Can’t choose a specific term

Cash value

Pro

No cash value

Accumulates at a constant rate, tax-deferred, over time; can access while alive

Con

No cash value

Outstanding loan amounts will diminish the death benefit payout

Estate planning

Pro

Not suitable for estate planning

Benefit is paid out tax-free and not subject to probate; can be left to beneficiaries, placed in a trust, or donated to charity

Con

Not suitable for estate planning

High cost if bought later in life

Reasons to consider whole life insurance

You may want to choose whole life insurance if:

  • You want lifelong coverage: Whole life insurance provides permanent coverage that spans your entire lifetime as long as premiums are paid. It can be suitable for end-of-life planning and can help cover expenses related to funerals and medical debt. It can also provide ongoing financial support for a spouse or dependent family member, or an inheritance to beneficiaries.

  • You can afford the higher premiums: Whole life insurance offers lifetime coverage and other key benefits but can cost you more than term life.

  • You want a policy that builds guaranteed cash value: Whole life insurance offers a cash value component that can grow on an income tax-deferred basis, which makes it a popular savings vehicle.

  • You have dependent family members: If you have dependent family members—particularly lifelong dependent family members, like a child or sibling with disabilities—whole life insurance can offer significant protection. You can use life insurance to fund a trust to provide care for your dependent family member.

  • You want the option to borrow against the cash value of the policy: Once you've paid a certain amount into the policy through premiums, you may be able to make a withdrawal or take out a loan against the policy. This may offer financial flexibility later in life, but it may lower the death benefit if not repaid.

How much do life insurance policies cost?

Many factors contribute to the cost of a life insurance policy–some you can’t control, others you can. The policy type (term or permanent), age, health, gender, driving record, occupation, hobbies, and the amount your loved ones would receive all contribute to the cost. By learning what may impact your premiums before you get a life insurance policy quote, you can better understand your options when choosing what’s best for you and your family.

Here are examples of potential costs based on a $500,000, 20-year term life policy for male vs. female applicants in excellent health. Rates for whole life insurance policies tend to be significantly higher.

Term life insurance policy quote

Age

Average annual rate for men

Average annual rate for women

30

$220

$183

40

$332

$281

50

$817

$641

60

$2,361

$1,656

70

$9,297

$8,204

Source: Quotacy. Lowest three rates for each age and risk class averaged. Data valid as of December 12, 2023.8

What if you already have one type of policy but want another?

No matter which kind of policy you have, you may be able to get the benefits of the other type. For example:

  • Convert your term policy into a whole life policy: Life insurance companies such as Guardian allow for this, and it can be an excellent way to continue your life insurance policy and build cash value for you to borrow against.

  • Buy a term policy to help supplement your whole life policy: If you feel you want an added level of protection, for example, to help supplement payment for your children’s college, a whole life policy can be a helpful addition for you to build cash value.

Alternatives to term and whole life insurance

Term and whole life insurance are the most common types of life insurance. There are, however, some life insurance alternatives you might want to consider:

Universal life insurance, like whole life insurance, is a type of permanent life insurance. Unlike whole life insurance, you can raise or lower premiums within certain limits.6 This may make it easier to afford during times of financial stress, but it can also affect cash value growth. Equally important, the total death payout may decline if you make too many minimum premium payments. One more note—with indexed universal life insurance, you can align a portion of your cash value with a stock market index, which gives you the potential for higher returns.7

Variable universal life insurance is a type of universal life insurance that offers permanent protections when premiums are paid.8 It offers flexibility in terms of premiums and the ability to invest through sub accounts. Like universal life insurance, the flexibility of variable life insurance has a cost, which could impact your overall cash value or death payout.

Annuities are insurance contracts that you can purchase with a lump sum payment or a stream of premium payments.9 In return for your investment, you’ll receive a regular income stream, which can start immediately or at a later date when you are closer to retirement. As with cash value life insurance, the funds invested in an annuity grow tax-deferred.

Annuities can pay you for a set period or for your entire lifetime. Many people purchase annuities to help ensure that they will have a consistent income stream through retirement. Others want to help ensure that their beneficiaries will have a consistent income stream in the event of their death.

So, which type of policy should you buy?

The truth is, there are many things to consider besides the type of life insurance policy you get.

  • How much coverage do you need?

  • What are all the different policy options (or riders)?10

  • Is there other coverage you need to protect your family?

  • Which is better for you, a whole life or term policy?

Contact Guardian to find a financial professional who will take the time to learn about your unique situation, listen to your concerns, and clearly explain the different options that best fit your needs and your budget–from a life insurance company that’s been helping protect families for over 160 years.

If you are an employee, your employer may provide life insurance as a benefit, or you may opt to pay for additional life insurance through payroll deductions. Taking advantage of your benefits at work can be a smart and cost-effective way to get financial security for yourself and your family. Consider contacting your HR department to review your plan details and determine how much life insurance may be available to you.

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 representative and refer to your individual whole life policy illustration for more information.

3 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.

4 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.

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

6 A Universal Life Insurance (UL) policy provides a flexible premium, a choice of death benefit options, and a guaranteed crediting rate, e.g., 2%). Policy growth is based on adequate funding, increasing crediting rates, and if the costs of insurance are lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates) and/or higher than expected (cost of insurance), the policy may lapse.

7 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. Its crediting rate is based on the performance of a stock index with a cap rate (e.g., 10%), a floor (e.g., 0%), and a participation rate (e.g., 100%). This type of universal life policy may lapse due to low or negative stock index performance, inadequate funding, and increasing insurance rates.

8 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

9 Annuity guarantees are backed by the strength and claims-paying ability of the issuing insurance company.

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

11 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.

12 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.

13 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

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Frequently asked questions about term vs. whole life insurance

Whole life insurance provides many benefits compared to a term life insurance policy: it is permanent, it has a cash value component, and it offers more ways to help protect your family's finances over the long term. Those features make it a better choice for many people, but if you’re only looking for the biggest death benefit you can get per dollar paid in premiums, then term life insurance may be a better choice.

Like any other financial services product, it depends on your life situation and goals. If you want life insurance coverage that lasts your entire lifetime, a whole life policy from a solid provider can be a great choice. It can also be a worthwhile option for older people concerned about estate planning and mitigating the effects of taxes on their heirs.

Generally speaking, when a term life policy comes to the end of its term (or fixed period), you either have to buy another policy (at a higher cost) or go without life insurance. One exception: If you have a term policy with a guaranteed renewal clause, you can renew at the end of your term on a year-by-year basis, typically at a higher rate. While expensive, it can be worthwhile if your health has declined or you are otherwise uninsurable.

Other types of permanent life insurance coverage include universal life insurance and variable life insurance, and variable universal life insurance.11,12 These policies have a cash value, like a whole life policy, and may let you vary your premiums; but, they are more complex than a whole life policy.13 Also, the death benefit amount may not be guaranteed. To find the best life insurance policy for your needs, consider speaking with a financial professional.

In general, death benefit payouts from a life insurance policy are not taxed, but always consult your tax professional to get all the details on tax advantages.

Look at your benefits communications or ask your HR manager. Most group life insurance plans through work offer term coverage. These life insurance options can be a good choice: premium payments tend to be cost-effective and are conveniently deducted from your paycheck, and you may be able to get coverage without a medical exam.

The key disadvantage of whole life insurance can be the cost. Typically, premiums for a whole life policy will be higher than those for a term life policy with a comparable death benefit. That said, it’s important to remember that whole life insurance offers several benefits not available with term life.

If you have term life insurance but would like to take advantage of whole life insurance instead, the sooner you switch is typically better. Younger people and those in good health are likely to enjoy lower premiums. If your term policy is close to ending, you can time your new whole life policy to begin when it ends. If you had a 10-year policy that’s ending in six months, for example, it may make financial sense to wait out the difference. Whatever you choose to do, make sure that there aren’t gaps in coverage that leave you and your family financially unprotected.

Yes, you can cash out a whole life insurance policy. Whole life insurance policies typically come with a cash value component that grows over time based on the premiums you pay and the interest credited to the account. You can take some or all of the cash out of your policy via the following options:

  1. Surrender: You can surrender the policy to the insurer, which means you cancel the coverage and receive the accumulated cash value minus any surrender charges.

  2. Loans: You can take out a loan against the cash value. This loan must be repaid with interest, but it does not affect your death benefit unless the loan remains unpaid.

  3. Withdrawals: You can make partial withdrawals from the cash value, though this will reduce the death benefit.

For more details, it's important to compare different life insurance options to understand their benefits and limitations. You can find additional information on whole life insurance policies and their features by visiting Guardian Life's comparison page.