Term Life vs. Whole Life Insurance: Key Differences and Benefits to Consider

Should I purchase a term life insurance policy or a whole life policy? This is the first question we ask ourselves after making the decision to purchase life insurance.

The first instinct may be to go with term life insurance because it is more affordable, but once you scratch the surface, whole life insurance has more benefits. So, it’s not strange that almost everyone who wants to buy a life insurance policy has the same question.

We’ll walk you through the key differences and factors to consider before deciding between term and whole life insurance.

Let’s dive in!

Table of Contents

    Whole Life Insurance: An Overview

    Whole life insurance is a type of permanent life insurance, meaning the insured person is covered as long as life insurance premiums are paid on time. Another term used for this life insurance is “cash-value life insurance” because it includes a cash-value component.

    Besides whole life insurance, other types of permanent policies are variable life insurance and indexed universal life insurance. However, the Insurance Information Institute says that whole life insurance is the most common type of permanent life insurance and the one that people buy the most. 

    And there is a reason for that! Compared to the other permanent policies, whole life is the simplest and most convenient. 

    After every premium, a portion of it goes toward the cash value, which continues to grow over time on a tax-deferred basis. It means that you won’t be paying any taxes on future gains.

    How Does Whole Life Insurance Work?

    Buying life insurance, especially whole life policies, is a tailor-made process for every individual. The policy is designed based on your mortality risk, your medical history, the level of coverage you want, and any extra features called additional riders.

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    The first step in this process is to apply for whole life insurance. After that, the insurance company will ask you to undergo a medical exam. The insurer’s actuaries will make your unique deal based on your results and provide you with:

    • A guaranteed death benefit: The amount that will be paid to your beneficiaries is secured and never decreases.
    • A guaranteed cash value: grows at a set rate annually until it is equal to the face amount of the policy at a specified age (usually age 100 or 121).
    • A guaranteed level premium: this never changes throughout the policy. The policyholder pays the same whole life premiums for the entire lifetime.
    • A guaranteed endowment: If the insured person is still living at the age set in the contract, the death benefit is guaranteed to be paid. It’s usually between the ages of 100 or 121.

    As you see, the whole life policy is more than just life insurance coverage. The cash value of a policy gives you many benefits for the rest of your life, such as the ability to borrow money against it.

    Earning Dividends

    You will have to make a significant decision if you want to purchase a whole life insurance policy. That decision is about choosing the right company. Maybe it sounds trivial, but it can make a huge difference. 

    If you choose a mutual insurance company, and not just any mutual insurance company but a successful one, you will have the opportunity to earn annual dividends. 

    This amount isn’t guaranteed, but there are ways to check if there is a chance to earn that money before signing the contract.

    Term Life Insurance: An Overview

    With term life insurance policies, you have flexibility in choosing the coverage period, but it is usually set for 10, 15, 20, and 30 years. This type of life insurance is sometimes called “pure life insurance” because it doesn’t support building cash value and is a little bit old-fashioned.

    Term life insurance is easy to understand. You buy life insurance for a certain amount of time, and if you die during that time, your beneficiaries will get a death benefit from the insurance company. And if you outlive the policy, you can either renew it or cancel it.

    People who choose term insurance over permanent life insurance usually point out that it’s more affordable.

    But the question that arises is: Is a simplified and more affordable option really the better one?

    You will find an answer at the end of this article.

    How Does Term Life Insurance Work?

    The annual costs of term life insurance stay the same for the level-term period. The big problem with this is that if you want to renew your policy after the fixed period ends, the rates will be higher because you’re older now.

    That’s why people usually choose term life insurance for a certain financial obligation. In fact, most people use this type of insurance to cover specific debts or college tuition, or as an income replacement.

    However, if you want to ensure a death benefit even if you only buy term insurance to cover financial needs, you can purchase accidental death benefits. It will provide an additional death benefit if you die in an accident, but be ready to pay more for this addition. 

    There are various types of term life insurance policies, but the safest option is to go with one that is possible to convert into a permanent life insurance policy (whole or universal life). 

    Eventually, you might change your mind and realize that permanent coverage is more beneficial to you. On top of that, switching to a permanent policy is usually more affordable than buying a new term policy.

    Also, for the people who had health issues during the time of their term life insurance, this is a better option because they don’t have to go under a medical exam, and therefore, their premiums will be lower.

    Term Life vs. Whole Life Insurance: Key Differences

    All types of life insurance are designed for the same goal—providing life insurance coverage for policyholders—and that is pretty much the end of their similarities.

    The first crucial difference between term and whole life is the coverage period. Term life insurance provides insurance coverage for a certain period of time, usually between 10 and 30 years, while whole life insurance provides lifelong coverage.

    The second discrepancy is whether the policy builds cash value or not. A whole life insurance policy has a savings component that provides cash value growth at a fixed interest rate, like a fixed annuity or a certificate of deposit. On the other hand, term life insurance doesn’t have a cash value component.

    These differences have a big effect on how you can use your life insurance policy and what benefits you will get for a certain amount of money.

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    Whole Life Insurance: Pros and Cons

    ProsCons
    Permanent coverageMore expensive
    You can take withdrawalsMore complex
    Tax-free death benefitNo option to convert
    Tax-favorable loans
    Liability protection
    Disability protection
    Distribution
    Using cash value for infinite opportunities

    Term Life Insurance: Pros and Cons

    ProsCons
    Tax-free death benefitNo cash value component
    Straightforward to understand and useLimited coverage
    CheaperThe maximum age limit

    Term Life vs. Whole Life: Which One Should You Choose?

    It should be easier to answer this question after reading this article and weighing the pros and cons of both life insurance types. 

    What is obvious after comparing these two tables is that whole life insurance offers more benefits than term life insurance, which justifies the slightly higher price. 

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    But the decision might still be difficult, especially because everyone has to deal with different challenges. To help you with that, we’ve made an example list of specific situations when it is more convenient to have one or another type of life insurance.

    Choose term life insurance if:

    • You want to cover the years of a mortgage or other outstanding loans.
    • You want to cover the years during which your children will go through college.
    • You are a business owner and have to repay your debts, outstanding taxes, or other expenses for your business.

    Purchase whole life insurance if:

    • You want to build wealth and leave money for your heirs.
    • You want to cover your funeral costs.
    • You have a lifelong dependent.
    • You want to have your personal banking system and stop depending on the banks.

    Pro Tips

    1. Don’t choose a term life just because it’s cheaper if you think a whole life would be better for you. There are always ways to make extra cash and cover the price difference. The whole life is more expensive initially, but possible returns overcome the price.
    1. Don’t be afraid to use life insurance as an investment vehicle. We know many people have an aversion to the word “investing” because they immediately think about the stock exchange and the risks of losing their hard-earned money. It’s not the case with using whole life insurance policies to invest.


    In fact, it is one of the safest ways to invest and earn money, and we can teach you how to do that.

    Take Your Lifestyle Ownership

    The ultimate reason to get a whole life insurance policy is because it can help you own your own lifestyle. This won’t happen overnight, but if you truly want to take control of your finances and create lasting wealth, this is the way to do it.

    How?  

    We’re glad you asked.

    Here at Wealth Nation, our team provides financial solutions through whole life insurance. We personally erased $140k in debt, and we made it our mission to teach you how to properly structure your policy and use it to achieve your financial goals.

    With a whole life insurance policy and this system in place, you can eliminate your debt and generate cash flow by doing more or less the same things you are currently doing.

    So, let’s be clear: you don’t have to give up on your current lifestyle to achieve financial freedom. When you understand the psychology of money and have enough knowledge to build your own financial system, you’ll be able to truly live and finance your dream lifestyle.