Term Life vs. Whole Life Insurance: Understanding the Difference

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Life insurance can be confusing. And nowhere is the confusion more apparent than in the discussion of term life vs. whole life insurance.

If you watch TV, you’re likely to see a lot of commercials for whole life insurance. But money expert Clark Howard isn’t a fan of whole life insurance. In fact, he says most people — with a few limited exceptions — would be better served by having a term life policy.

In this article, we’ll explain what term life vs. whole life is and which one would make more sense for you.

Here’s What You Need to Know About Term Life vs. Whole Life

Whenever you’re thinking about insurance, you want to ask yourself the question: What’s the purpose of this insurance?

Or, to use the lingo of the insurance industry, you want to establish what your “insurable need” is. Why do you need the insurance? What are you trying to accomplish with the policy? There are very different use cases for term life vs. whole life.

Table of Contents

A Look at Term Life Insurance


Key Highlights:

  • Pays a death benefit to your beneficiaries
  • No investment component or cash value
  • Buy it for a set number of years
  • Premiums remain the same throughout the life of the policy
  • Monthly premiums are typically low

Term life insurance is a easily understandable insurance policy that simply pays out a death benefit to your beneficiaries. Nothing more and nothing less. There’s no investment account tied to it, as there is with some whole life insurance.

So, at its core, term life is just used for replacement of income if you die during your prime working years.

The idea of the “term” is that you buy the policy for a set number of years — usually 20 or 30 years. So let’s say you and a spouse are just starting a family. You may want to buy a 20-year term policy. Because it will provide income for your family in the event you die before your children are grown.

The premiums are generally very low — often around $50 a month for a middle-aged man and much lower for someone younger. Another nice feature of term life is that the premium stays the same month after month and never goes up!

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For a deeper understanding of term life, be sure to read our article What is term life and should I buy it?

A Look at Whole Life Insurance


Key Highlights:

  • Pays a death benefit to your beneficiaries
  • Has an investment component with cash value
  • There are no term limits — coverage follows you all your life
  • Premiums remain the same throughout the life of the policy
  • Generally has much higher premiums than term life

Whole life is a kind of permanent life insurance. Like its suggests, it has no term limits like term life does. So, you don’t buy it for a set period of 20 or 30 years and then expect it to expire.

In fact, you can have it for multiple decades and the policy stays with you throughout the years. That’s where the name “whole life” comes from.

There’s also another way it’s unlike term life insurance. While term life only pays out in the event you die, whole life policies typically add an investment component into the insurance equation.

With the investment part, the policy has a tax-deferred cash value. That means the money isn’t taxed while it’s growing. But it is taxed when you use the money. To use the cash value, you can either withdraw money from the policy, borrow against and repay it or even cash the policy out entirely.

Obviously, if you choose to cash it out the policy won’t be there to pay out to beneficiaries when you die.

Which One Makes Sense for You?

As we mentioned earlier, Clark Howard is a big fan of term life for most people.

“Life insurance has gotten much cheaper over the years, in part because people are living longer,” Clark says. “Add into the mix the Internet, which has made it ultra-easy to compare prices when shopping for life insurance. The result is that term life insurance costs have dropped by two-thirds in the last 15 years. That’s a great deal!”

If you have someone who depends on you financially — like kids or a stay-at-home spouse — then you would probably best be served with a term life insurance policy.

By contrast, whole life really isn’t ideal for a lot of people. But it might work for one subset of the population, according to Clark.

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“Whole life insurance is only a good choice if you are ultra-high income earner who earns about $400,000 annually.” Clark says. “If that’s you, you can benefit from some tax advantages that come with the policy.”

As always, be sure to consult with your tax advisor before buying a whole life policy — even if you do earn around $400,000.

Final Thought

Insurance can seem complicated, but it doesn’t have to be. When you get right down to it, there are really only two kinds of policy choices — term life vs. whole life. The former works for just about everybody, while the latter only makes sense for a small sliver of the population.

Ready to buy a term life policy? You’ll want to check out our guide to the best life insurance companies first.

Next, be sure to read our step-by-step tutorial on how to buy term life insurance. It will walk you through the six simple steps you need to take to get the right protection for your family today!

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