The Differences Between Term and Whole Life Insurance

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Buying life insurance now provides a financial safety net for your dependents later if you’re not around to take care of them. After you’re gone, your family can use the proceeds to cover funeral costs, mortgage payments, college tuition and other expenses.

Take care of what matters most

Your family is unique — your life insurance should be, too.

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There are two main types of life insurance:

Term life insurance is the easiest to understand and has the lowest prices. You can get term life insurance quotes online.

Permanent insurance is more complex and tends to cost more than term, but it offers additional benefits. Whole life is the most well-known and simplest form of permanent life insurance. Other kinds of permanent life insurance include universal, variable and variable universal.

Want to know more? Let’s take a closer look at term life versus whole life insurance.

In this article

Term life insurance explained

Whole life insurance explained

Policy differences

Term life versus whole life cost comparison

Choosing between term life and whole life

Term life insurance explained

Term life insurance provides coverage for a certain time period. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.

You choose the term when you buy the policy. Common terms are 10, 20 or 30 years. With most policies, the payout, called the death benefit, and the cost, or premium, stay the same throughout the term.

When you shop for term life:

• Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early.

• Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.

Ideally, your family’s need for life insurance will end around the time the term expires: Your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net.

All of the best life insurance companies sell term life, so it’s easy to find rates.

» COMPARE: NerdWallet’s life insurance comparison tool

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Whole life insurance explained

Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly, tax-deferred, meaning you won’t pay taxes on its gains while they’re accumulating.

You can borrow money against the account or surrender the policy for the cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.

Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component.

Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:

• The premium remains the same for as long as you live

• The death benefit is guaranteed

• The cash value account grows at a guaranteed rate

Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.

» MORE: How to find the best whole life insurance policy

Policy differences

Policy features Term life insurance Whole life insurance Choice of policy length ✓ Provides lifelong coverage ✓ Premium generally stays the same ✓ ✓ Low premium ✓ Life insurance payout amount is guaranteed ✓ ✓ Accumulates cash value ✓ Might be eligible for annual dividends ✓

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Cost comparison

Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.

Below are annual price comparisons between term life and whole life insurance. We used 20-year and 30-year term life policies because no apples-to-apples comparison is possible for the length of term life to whole life.

Person coveredPolicy amountWhole life30-year term life20-year term life Annual premiums using an average of three lowest prices available in each category for healthy men and women. Source: Quotacy. Male, age 30$250,000$2,403$227$152 $500,000$4,747$373$232 $1 million$9,283$657$387 Female, 30$250,000$2,150$194$135 $500,000$4,241$314$201 $1 million$8,280$539$310 Male, age 40$250,000$3,572$343$212 $500,000$7,085$612$347 $1 million$13,902$1,132$600 Female, 40$250,000$3,037$284$182 $500,000$6,015$492$294 $1 million$11,787$896$509 Male, age 50$250,000$5,548$819$473 $500,000$11,036$1,535$856 $1 million$21,726$2,927$1,630 Female, 50$250,000$4,611$621$364 $500,000$9,164$1,140$655 $1 million$18,021$2,142$1,174

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Choosing between term and whole life insurance

Term life is sufficient for most families who need life insurance, but whole life and other forms of permanent coverage can be useful in certain situations.

Choose term life if you:Choose whole life if you:

Only need life insurance to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage.

Want the most affordable coverage.

Think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.

Want to provide money for your heirs to pay estate taxes. In 2019, estates worth more than $11.4 million per individual or $22.8 million per couple are subject to federal estate taxes. State estate taxes vary. Here’s a map of state 

estate and inheritance taxes

 from the Tax Foundation.

Have heirs who might be forced to sell off parts of your estate to pay the tax bill without an insurance payout.

Have a lifelong dependent, such as a child with special needs.

Life insurance can fund a special needs trust

to provide care for your child after you’re gone. Consult with an attorney and financial advisor if you want to set up a trust.

Want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs.

Want to equalize inheritances. If you plan to leave a business or property to one child, whole life insurance could compensate your other children.

Cut the Cord and Save Money (If You Do It Right)

At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations. Our opinions are our own.

Cutting the cord can save you money as long as you go into it with the right mindset. If you’re aiming to completely replace your cable channels or to have every episode of every show at your fingertips, you likely won’t end up with significant savings.

Know your price

Regardless of whether consumers have bundled internet and television service or not, they spend on average about $103 per month on pay TV, according to Leichtman Research Group. So there are surely savings to be had if you’re willing to make some sacrifices.

You can often save money by trimming your cable package or cutting the cord completely. You’ll likely find cheaper cable prices advertised, but keep in mind these don’t include extra taxes, fees and equipment rentals, which can bloat your monthly bill.

If you have a bundle package, with TV and internet or home phone service, you may end up paying relatively more for the internet-only portion when you remove cable, especially if you’re still paying the promotional bundle price.

If you‘re getting rid of cable altogether, shop around to make sure you get a good deal on your internet-only service and that you purchase enough bandwidth for everyone in your household to stream their shows.

You could be saving up to $50 per month on your bills. See how much you could save.

NerdWallet can help you lower your bills and find you more ways to save money.

Your bill provider

Your monthly bill amount

Know your usage

Time for more strategizing. Just like when shopping for a cable package, think about your must-haves. How highly do you value watching live sports or catching the latest episodes of your shows right when they air? There are myriad on-demand streaming services, but they usually lack access to live TV and up-to-date episodes.

live TV options

If live cable channels are a must, you’ll want to prioritize services like Sling TV, Playstation Vue and DirecTV Now. These options are generally more expensive than other streaming services but can still come out to much less than the average cable bill.

The basic Sling TV package of around 30 channels is $20 per month. Playstation Vue starts at $49.99 for around 45 channels (although as of this writing it has a promotional price of $39.99). DirecTV Now’s smallest package runs $35 a month for about 60 channels. These packages include channels like ESPN, AMC, HGTV and Cartoon Network — but obviously you won’t get everything in every package.

These are all newer services, so there might by some content delivery hiccups to work out. However, they all promise no hidden fees on top of the advertised price and easy cancellation, in contrast to many people’s experiences with cable.

And don’t forget, you can still receive your local broadcast channels live in high definition with a digital antenna. You might be able to get away with broadcast TV for the bigger events you want to watch live and cheaper streaming services to round out your options.

BASIC STREAMING SERVICES

Those cheaper services — like Netflix ($7.99 per month), Hulu ($7.99 per month) and Amazon Prime Video ($8.99 per month) — don’t have live channels, but they do have large libraries of TV episodes, feature films and documentaries on demand. You’ll want to look into what each one has to offer and, again, prioritize your subscriptions rather than signing up for everything.

HBO

If you can’t live without Netflix’s original series, there’s an easy answer. But if you need to catch every episode of “Game of Thrones” the night it airs, you might have a more difficult decision. HBO Now lets you watch episodes immediately when they air, but it’s $14.99 per month. It has a (relatively smaller) library of other movies, HBO shows and stand-up comedy specials, but if you’re not interested in those, then $15 per month might not be worth it.

For now, companies like Netflix and HBO are relaxed about paying subscribers sharing their login information with other people, though there may be limits on how many screens you can watch simultaneously.

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One scenario

Let’s look at a hypothetical situation. A Spectrum promotion offers around 175 channels and 60 Mbps internet for $110 per month. The internet service alone costs $45 per month. Note that these promotional prices are only for a certain period and don’t include taxes or fees. (You might even be able to find cheaper internet-only service if you don’t need that much speed.)

Say you cut the cable TV part of Spectrum’s service and sign up for something like the basic DirecTV Now package ($35 per month), recovering 60 of those channels, plus Netflix ($7.99 per month) for access to extra movies and shows.

Now you’d be paying approximately $88 per month, not including taxes or fees. You’d have access to live TV and a good amount of on-demand content. You might miss those extra channels, but you’d be saving $264 a year.

Know the trade-offs

Remember, you’ll likely need to downsize your entertainment options to save money. Also keep in mind what else you’re getting with subscription streaming: on-demand entertainment and no extra cable charges. You watch when you want and won’t have to worry about the price inflating when your promotion expires.

Cutting the cord might not work out for everyone at the moment. Streaming video over the internet is quickly becoming the norm, but for now 82% of households still pay for TV through cable or satellite. There’s good reason for it: Streaming services have yet to completely replace traditional pay TV at a reasonable price. Until they do, you’ll have to live with the expensive cable bill or reduced entertainment options.