What's the Difference Between Term and Whole Life Insurance?

How term life insurance works

A term policy provides a death benefit if the insured dies within a fixed period, commonly 10, 20, or 30 years. The policy carries no cash-value component, and if the insured outlives the term, coverage typically ends with no payout unless the policy is renewed or converted. Premiums on most term policies are level for the initial term, meaning the payment amount does not increase during that period, though renewing after the term ends is generally priced at a higher rate reflecting the insured's age at renewal.

How whole life insurance works

A whole life policy provides coverage for the insured's entire life, as long as scheduled premiums are paid, and includes a cash-value account that grows on a tax-deferred basis over time. Policyholders can typically borrow against the accumulated cash value or, in some cases, withdraw from it. An outstanding policy loan against the cash value, if unpaid at the insured's death, is generally deducted from the death benefit paid to beneficiaries.

Premium and cash-value differences

For the same death benefit and insured profile, term premiums are generally lower than whole life premiums, since term coverage has no savings component and a defined end date. Whole life premiums are typically level for the life of the policy and fund both the insurance cost and the growing cash-value account. The cash-value growth rate on a whole life policy is set by the insurer, often as a minimum guaranteed rate plus the possibility of additional dividends on participating policies, which differs from the market-linked growth found in variable universal life insurance.

Conversion options

Many term policies include a conversion rider that allows converting some or all of the coverage to a permanent policy within a specified window, typically without requiring a new medical exam. Conversion terms — including the window and available permanent policy options — vary by insurer and policy.

Other categories of permanent life insurance

Whole life is one type of permanent life insurance; universal life offers more flexibility in premium amount and death benefit within limits, and variable universal life ties the cash-value growth to the performance of selected investment sub-accounts, introducing market risk that a standard whole life policy's guaranteed cash-value growth does not carry.

What happens if premiums stop being paid

On a term policy, missing a premium payment beyond the grace period specified in the policy generally results in the policy lapsing, ending coverage with no payout. On a whole life policy with accumulated cash value, some policies allow the cash value to be used to cover a missed premium automatically, or allow the policyholder to reduce the death benefit to a smaller, fully paid-up amount rather than continuing premium payments — options that depend on the specific policy's provisions.

Riders available on both policy types

Both term and whole life policies commonly offer optional riders — additional provisions attached to the base policy for an added cost — such as an accelerated death benefit rider, which allows early access to a portion of the death benefit if the insured is diagnosed with a qualifying terminal illness, or a waiver-of-premium rider, which waives premium payments if the insured becomes disabled as defined by the policy.

How premiums are underwritten at different ages

Because premiums are priced in part based on the insured's age at the time of application, a term policy taken out at a younger age generally locks in a lower premium for that term than the same coverage applied for later in life. A whole life policy's premium is similarly set based on the age at issue and, once established, is designed to remain level for the life of the policy, in contrast to the higher renewal pricing that applies if a term policy is renewed rather than replaced.

Frequently Asked Questions