AARP Hearing Center
Which Is Better: Term Life Insurance or Whole Life Insurance?
Both provide protection for your loved ones. Here’s how to determine the best policy for your needs
Term life and whole life insurance both protect your loved ones, but understanding the differences can help you choose the coverage that fits your family and budget.
Pete Ryan
Key takeaways
- Term life insurance provides coverage for a set period and pays a tax-free death benefit if you die during the policy term.
- Whole life insurance lasts for your lifetime, builds cash value and generally costs much more than term coverage.
- Before buying a policy, compare quotes, evaluate coverage needs and verify that the insurer and agent are licensed.
Even if you’re a nonsmoker who always wears a seat belt and avoids bungee jumping, you’re not invincible. Life insurance recognizes that fact and provides a way to protect your family if something happens to you.
But once you’ve determined that you want to purchase life insurance, you’ll need to decide what kind of policy will fit your needs.
More Ways to Benefit
- Related Benefit 1
- Related Benefit 2
- Related Benefit 3
- Related Benefit 4
- Related Benefit 5
What is term life insurance?
Let’s start with term life insurance, which is the most straightforward type. You purchase a policy for a set period (the term), usually 10 to 30 years. If you die during that period, your beneficiaries will typically receive a tax-free sum of money, known as a death benefit. Premiums for term life insurance policies are fixed, providing predictability for your budget.
Financial planners often recommend buying a policy that will cover 10 times your pretax annual salary, but that’s just a starting point. To hone in on the amount of income you’d need to replace and the length of the policy’s term, consider your liabilities, such as outstanding debts (including your mortgage), your family’s living expenses and the cost of your children’s education, including college.
Life Happens, a nonprofit that does not endorse any insurance company, product or financial professional, offers a life insurance calculator you can use to estimate the amount of coverage you’d need.
Many employers offer term life insurance as an employee benefit, but the coverage is usually pretty limited — often one or two times your annual salary — and the policy does not typically carry over to a new job. You may have the option of buying supplemental coverage through your employer, and because these policies are sold on a group basis, the premiums may be lower than what you can get on your own.
For many people, term life insurance is relatively inexpensive. A 40-year-old nonsmoking man, for example, could buy a 20-year policy with a $500,000 death benefit for between $28 and $47 a month, according to Policygenius, an online insurance marketplace that allows consumers to get quotes from different insurance companies.
The downside is that once a term policy expires, it has no value. If you still need life insurance after it ends, you’ll likely need to apply for a new policy, and since you’re older, you’ll pay higher premiums. If you’ve developed health problems, such as high blood pressure or diabetes, your premiums could be significantly higher, or your application could be denied. Some term policies offer the option to convert to a whole life policy when the term expires, but you may have to pay a fee for the option, and your premiums will likely be higher after you convert.
Term policies are most appropriate for individuals who want coverage for a specific period — until your kids are 18, for example, or until they’ve graduated from college.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that will cover you for your lifetime as long as you keep up with the premiums, which are charged monthly, quarterly or yearly. Like term life insurance, it provides a tax-free death benefit to your loved ones if you die, but it also provides features you won’t find in a term insurance plan.
With whole life insurance, a portion of your premiums is placed in a cash account, which grows, tax-deferred, over time. Once this account reaches a predetermined amount, you can borrow from it, use it to pay your policy’s premiums or cash it out to supplement your retirement income.
These whole life cash value accounts usually grow at a fixed interest rate, which may be adjusted periodically. Some whole life plans also pay dividends that can increase the amount in the cash account.
While premiums for a whole life plan are fixed, they’re often much higher than those for a term policy. Premiums will vary depending on your situation, but a 40-year-old man who doesn’t smoke will pay an average of $706 a month for a $500,000 whole life policy, according to Policygenius. If you can’t pay the premiums, you can cancel the policy, but surrender charges may reduce the amount of your cash value. Generally, the earlier you cancel, the higher the surrender charges; if you hold the policy long enough (generally 10 to 15 years, depending on the policy), those charges will disappear.
A whole life policy may be a good choice if you have dependents who will require lifetime care, such as a disabled family member. You might also like the idea of using a cash account as a backup source of funds that grows over time.
How to buy life insurance
There’s no shortage of companies that sell life insurance, but as is the case with any major purchase, you need to do your homework.
For term life insurance, the process is straightforward. Once you’ve determined the amount of insurance you’d like to buy and the length of the term, you can get quotes for policies at websites such as Policygenius, SelectQuote and ValuePenguin. You’ll be asked for some basic information, such as your age, weight, ZIP code and whether you smoke or engage in high-risk activities (see: bungee jumping).
Alternatively, an insurance agent can help you shop for a policy. You can find one at Trusted Choice, a network of more than 24,000 independent agencies nationwide.
Buying a whole life policy is more complicated because premiums can vary significantly, depending on the types of features the policy provides. In addition, agents who sell whole life insurance receive a substantial upfront commission, which provides an incentive for some to engage in hard-sell tactics. Ideally, you’ll want to work with an agent who sells policies from different companies, versus a “captive agent” who only represents one insurer.
Make sure the agent and insurance company are licensed to operate in your state. You can check a company’s licensing information at the website for the National Association of Insurance Commissioners, which also offers tips on vetting an insurance agent.
AARP Membership
Join AARP for only $15 per year with automatic renewal. Get instant access to members-only products and hundreds of benefits, a free second membership, and a subscription to AARP The Magazine.
You Might Also Like
How to Skip Quarterly Taxes in Retirement
Adjusting your income withholding may help you avoid IRS penalties
What Is Zombie Debt?
Collectors may come after you for money you no longer owe
Ways to Save on Insurance
Premiums are climbing. Take these steps to save hundreds or thousands of dollars