Choosing between whole life insurance vs. term life insurance: Which is right for you?

Are you interested in getting life insurance but don’t understand the difference between whole life and term life policies? You’re not alone. Overall, there are 102 million uninsured and underinsured Americans – and 53% of them say it’s because they just don’t know how much they need or what type to get, according to LIMRA (Life Insurance Marketing and Research Association).

Understanding the difference between whole life insurance and term life insurance is the first step toward making the right choice for your financial security. Both options have their merits, but knowing how each of them work can help you find the right insurance policy for your needs. Learn about whole life insurance vs. term life insurance so you can decide which type is best for you.

Whole life versus Term life insurance: What's the difference?

Whole life insurance

Whole life insurance is a form of permanent life insurance that provides coverage – and requires premium payments – typically for your entire lifetime. It offers a death benefit to your beneficiaries when you pass away, and it has cash value that can grow over time. 

Note: Premiums for whole life insurance are typically higher than those for term insurance, but they remain level throughout the policy's duration.

One of the key advantages of whole life insurance is its lifelong coverage and assurance that your beneficiaries receive a death benefit after you pass away. The value you accumulate may also be accessed under certain circumstances if needed.

Pros of whole life insurance

1. Lifelong coverage: As long as you pay your premium, your beneficiaries are guaranteed to receive a death benefit when you pass away. Some guaranteed issue whole life policies may have a graded death benefit period, so be sure to refer to your policy for details. If you have dependents who will need financial support beyond a specific term, this type of policy can help provide peace of mind.
2. Cash value: A portion of your premium payments goes towards building up a cash value, which grows on a tax-deferred basis. This can serve as a potential source of funds for emergencies, education expenses, or retirement planning if needed.
3. Stability and certainty: Whole life insurance premiums remain level throughout the life of the policy so you can make room for it in your budget. 
4. Additional benefits: Whole life insurance policies may come with additional benefits like dividend payments for “participating” policies, which can be used to increase the policy's cash value. Additionally, whole life insurance can be an effective estate planning tool, providing liquidity to cover estate taxes and ensuring a smooth transfer of wealth to your heirs. Refer to your policy for details regarding your specific benefits.

Cons of whole life insurance:

1. Higher premiums: Whole life insurance premiums are generally higher compared to term life insurance. This can make it a difficult choice for those on an already-tight budget.
2. Limited flexibility: Coverage and premium amounts are typically fixed at the time of purchase, leaving little room for adjustment in response to changing financial circumstances or needs. If you require more coverage, you may need to purchase an additional policy, which can further increase costs.
3. Complexity: Whole life insurance policies can be more difficult to understand compared to term life insurance. The combination of lifelong coverage, cash value accumulation, and potential dividend payments involves more moving parts, making it more challenging to compare policies and choose the right coverage.
4. Opportunity cost: The premiums allocated to cash value growth could potentially yield higher returns if invested.

At Ethos, we offer whole life insurance to individuals aged 65-85. Learn more about whole life insurance through Ethos.

Term life insurance

Term life insurance provides coverage for a specific period or "term," usually ranging from 10 to 30 years. Unlike whole life insurance, term insurance does not include a cash value component. It is designed to provide financial protection during a particular phase of your life, such as when you are raising children or paying off a mortgage.

Term insurance policies offer a death benefit to your beneficiaries if you pass away, too, but only within the term of the policy. The premiums for term insurance are generally lower compared to whole life insurance, making it a more affordable option, especially for individuals or families on a budget. However, once the term ends, the coverage terminates, and there is no cash value or death benefit provided unless you renew or convert the policy. You can also choose to purchase a new term policy.

​​Pros of term life insurance

1. Affordability: Term life insurance is generally a low-cost option making it more accessible to a wide range of individuals, including young families and those on a budget.
2. Flexibility: Term life insurance offers flexibility in terms of policy duration. You can choose a term that aligns with your specific needs, such as 10, 20, or 30 years. This flexibility allows you to match the coverage period with significant financial obligations or milestones, such as paying off a mortgage, raising children, or reaching retirement age.
3. Simplicity: Term life insurance policies are relatively straightforward and easy to understand. They focus solely on providing a death benefit to your beneficiaries if you pass away during the term of the policy. There are no complex investment features or cash value accumulations to navigate.
4. Coverage for critical periods: Term life insurance is particularly suitable for covering critical periods in your life when financial obligations are high. For example, if you have young children who depend on your income, a term policy can provide financial protection until they become financially independent.

Cons of term life insurance:

1. No cash value: Once the term ends, there is no accumulated cash value available. If you outlive the term of the policy, you will not receive any return on the premiums you paid.
2. Limited coverage period: Once the term expires, the policy terminates unless you choose to renew or convert it. If you still need life insurance coverage beyond the initial term, you may face higher premiums or potential difficulties in obtaining coverage due to age or health changes.
3. Premium Increases upon renewal: If you decide to renew your term life insurance policy at the end of the initial term, premiums may increase significantly.
4. Living benefits: Some term life insurance products may include an Accelerated Death Benefit Rider. This rider may allow the insured to access the death benefit while they are living if they have a terminal illness. There are no additional features such as policy loans, cash value withdrawals, or the potential to earn dividends as with whole life insurance.

Ethos, we offer term life insurance to individuals aged 20-65. Learn more about term life insurance through Ethos.

Choosing the right option for you: Whole life insurance vs. term life insurance

Deciding between whole life insurance and term life insurance depends on various factors, including your financial situation, goals, and stage of life. Here are a few considerations to help you make an informed decision:

What are your financial goals?

If estate planning, and lifelong coverage are important to you, whole life insurance may be the better choice. If your primary goal is temporary coverage during a specific period, such as until your children are financially independent or your mortgage is paid off, term life insurance might be the way to go.

How much life insurance premium can you afford?

Consider your budget and your ability to pay premiums. Term life insurance offers lower initial premiums, which can be beneficial if you have limited financial resources or other financial priorities. Whole life insurance premiums are higher but remain level, providing certainty and stability in terms of cost.

How long do you want your life insurance coverage to be?

Evaluate how long you need life insurance coverage. If you anticipate the need for coverage beyond a specific term, such as for estate planning purposes or to provide for dependents with special needs, whole life insurance offers lifelong protection. If you only require coverage for a limited period, term life insurance can provide temporary protection at a more affordable price.

Making an informed life insurance decision

Choosing between whole life insurance and term life insurance requires careful consideration of your unique circumstances and priorities. Some individuals may opt for a combination of both policies to address different financial goals. It’s a good idea to consult with a financial advisor or insurance professional to go over your options and help you make an informed decision that aligns with your long-term financial plan.

Ethos can help take the confusion and waiting out of life insurance decisions. Learn more about how we do things differently.\ \ ChatGPT was used for idea generation, but the author made significant modifications and takes ultimate responsibility for the content.