Term vs. Whole Life Insurance: What’s the Difference?

From the high cost of giving birth to the price of soccer uniforms, it’s nearly inevitable that your finances will change when you become a parent. Most of all, there’s this knowledge: Another human depends on you.

That’s where life insurance comes in. It’s important to help make sure your family is protected if something happens to you, but it can be complicated—so doing your own homework is beneficial.

And the first step to doing your own homework is to understand the facts when it comes to term vs. whole life insurance.

Term life insurance and whole life insurance are quite different, so we can't make a fair apples-to-apples comparison. That said, it’s important to understand some of the key attributes of and differences between term and whole life insurance to help you to make an informed decision.

Know the Facts: Why Get Life Insurance?

Life insurance is an agreement between you and an insurance company. It says that if you pass away, the insurance company will pay a lump sum to the people you’ve designated as your “beneficiaries.”

It'll do so as long as your policy payments are up to date and you’ve met certain requirements that you agreed to when you purchased the policy (for example, answering all applications questions accurately).

As you might imagine, one of the most common reasons to get life insurance is to help protect dependents like children.

What's Term Life Insurance?

Term life insurance is sometimes called “pure life insurance” because the purpose of the policy is straightforward: It provides a death benefit to your beneficiaries if you were to pass away while the policy is active or “in force.”

Typically, people have the highest need for life insurance during the first 20 years of their children’s lives. After that, their kids are likelier to be self-sufficient. As a result, 20 years is one of the most popular term lengths available. There are many different ways you can use a life insurance payout, from paying off debt to funding household expenses.

What's Whole Life Insurance?

Unlike term life policies, whole life insurance policies (also known as “permanent life insurance”) offer coverage for your entire life, as long as premiums are paid. In addition to paying a death benefit, whole life policies can also build cash value over time. You can borrow against or withdraw from this cash value while you’re alive.

As a result of whole life’s ability to earn interest and accumulate cash value, however, these policies tend to be more complex and more expensive than term life insurance. Certain fees and expenses associated with whole life policies may reduce the cash value, which can, in turn, affect the benefit amounts.

There are a few other types of whole life policies including, universal, variable and indexed universal life insurance. Universal life insurance is another form of permanent life insurance that gives you more flexibility to adjust your death benefit without opening a new policy, subject to the terms of the contract. (Increases in coverage are subject to underwriting based on health and other factors.) You can also lower your monthly premium payments by paying from the cash value account. Please keep in mind, however, that withdrawals may be subject to charges and interest is charged on loans, they may generate an income tax liability, reduce the account value and death benefit, and may  cause the policy to lapse.    

Variable and indexed universal life insurance policies are similar, but differ in how the cash value accumulates. For example, variable life insurance gives the policyholder an opportunity to invest the cash value of their policy in investments in order to generate more interest. That said, this can put the funds at risk of loss and there is no guarantee of earning a return. If your cash value drops too low, you may need to pay higher premiums to keep the policy in force and keep your policy from lapsing.

Indexed universal life, on the other hand, allows the policyholder to link the earnings potential of the cash value, in part, to index funds. There is often a cap on how much interest can be earned, in addition to a floor provided by the contract. So, even if the index funds don’t perform well, there will be no loss to the cash value due to market fluctuations (though fees and charges can still reduce the cash value over time).

For both term and whole life insurance policies, the death benefit is generally income-tax free, meaning that your beneficiaries may not owe taxes on the payout. However, there are certain circumstances where life insurance might be included as part of your taxable estate. For more details on how this all works, reach out to a tax advisor.

Why Some People Choose Whole Life Insurance

As you can see, the difference between whole life and term life insurance can be significant. Some people pick whole life insurance so they can leave behind money for their beneficiary or beneficiaries. With term life insurance, the death benefit would only be paid if they died during a certain time frame. With whole life insurance, it doesn’t matter when they pass away (as long as their premiums are paid and the policy is active).

Another reason you might choose whole life insurance is if you want to provide money for your survivors to pay estate taxes. These taxes are levied on large estates worth over a certain amount ($13.99 million in 2025).

Whole life insurance could potentially help avoid forcing your heirs to sell off parts of the estate, like heirlooms or real estate, to cover the estate tax bill. Anyone who is considering a whole life policy for this reason should consult a tax professional before making any decisions.

Whole life insurance might also make sense if you have lifelong dependents, like a child with special needs, as you could fund a special needs trust through a life insurance payout. (Of course, you’ll want to talk to a lawyer and/or a financial advisor before creating a trust.)

If you have a high-risk medical condition, it’s possible you’d only be able to qualify for a “guaranteed issue” policy, which doesn’t typically require a medical exam. These are a subset of whole life insurance. They tend to be more expensive, while offering a lesser death benefit.

Why Some People Choose Term Life Insurance

Term life insurance may make sense for people who only need to replace their income during a certain time period, like specific years during which they’re supporting their kids or paying off a mortgage.

It may also make sense for people who are looking for the most affordable coverage available, and for those who're interested in whole life insurance but can’t afford it currently. (Sometimes, you can convert all or part of a term life policy to a whole life policy down the road, though increases in coverage are subject to new underwriting.)

Ideally, you'd spend the term of your insurance getting out of debt, paying down your mortgage and investing a portion of your income. If so, you could have enough savings and no mortgage by the time your term life insurance policy expires. That could mean you might be fine on your own at the end of the term, without needing additional coverage.

Although term life insurance doesn’t build up cash value that can be borrowed against, an alternative approach may be to get a term policy and then invest the difference in premiums that would have gone to a whole life insurance policy.

For example, say you received a quote to pay approximately $20 a month for a $500,000 policy for a 20-year term. Now let’s say that hypothetically you could pay $320 a month for a whole life policy with the same amount of coverage. Potentially, you could sign up for the less expensive insurance and invest the difference of $300 per month. Of course, this example is hypothetical and not indicative of any specific life insurance policies.

Term vs. Whole Life Insurance: Factors to Consider

The choice between these two types of life insurance will be very personal and depend on your own family and financial situation. Some factors you might want to think about include:

• Your current age

• How’s your health right now?

• What kind of funeral or final arrangements do you want, and can your family afford those expenses without additional help?

• How old are your kids?

• Do you have a mortgage or other debts that your family might need help paying off?

• What’s your retirement plan, and how much do you have saved up already?

• Do you feel strongly about leaving money behind for your beneficiaries?

• What kind of financial needs do you anticipate your family having in the future? This could include everything from daycare to braces to paying for college to the overall cost of raising your kids to adulthood.

• How big do you estimate your estate will be when you die, and will your heirs likely face estate taxes?

• Do you plan to set up a trust for any of your heirs?

• Do you want to donate your assets to charity when you die? If so, do you need an extra boost to be able to afford doing so?

• In some cases, because the whole life policies are more expensive, people might buy less coverage than they need in order to afford their policies. How much life insurance coverage does your family really need, and what premiums can you afford?

• How do you feel, emotionally, about potentially paying for a term life insurance policy without getting that money back, if you outlive the term?

• Conversely, how do you feel about potentially paying large premiums every month over a long period of time?

Term vs. Whole Life: Premiums

There are additional “flavors” of both term and whole life insurance. The main differences between the policies below are about how the death benefit changes over time.

For all of these, however, the premium generally remains the same month after month or year after year. This will depend on how often your premiums are set to be paid. The only thing that changes is the benefit your beneficiary (or beneficiaries) would receive if you were to die.

Term Life Insurance Policy Options:

• Level: This is the most common type of term life policy, in which your premium is level (meaning it doesn’t change over time), and so is your benefit. If you had a 10-year level term policy with a $1 million death benefit, you’d pay the same premium each year during that 10-year span, and if you were to pass away at any time during that period, your beneficiaries would receive $1 million.

• Renewable term: This type of policy allows you to renew your original term life coverage for an additional period of time without undergoing new health underwriting. You will pay a higher premium based on your age at the time of the renewal. You may only be able to extend for one year at a time, depending on your policy.

Whole Life Insurance Policy Options:

When it comes to whole life insurance, most policies have a fixed premium that you pay monthly or annually. That said, there are a few other varieties within the category of whole life insurance:

• Continuous premium (straight life): This is sometimes called ordinary life or continuous premium whole life. You pay the premium from the time the policy is issued until you die, or until you turn 121 (OK, sure). Generally speaking, this kind of policy tends to have the lowest annual premium.

• Limited pay: You only pay your premiums for a certain duration. This could be 20 years or until you hit a specific age. Because you’re only paying for a limited time, the premium will generally be higher than with continuous premium policies.

• Single premium: Under this variety, you pay just one single lump sum at the time you open the policy, rather than paying monthly or annual premiums.

Converting Term to Whole Life Insurance and Other Combo Approaches

Many term life insurance policies offer the ability to renew, convert to whole or both. 

Renewability means you can renew your coverage when it expires, without any additional evidence of insurability. That doesn’t mean you’ll get to do so at the same rate—in fact, your rate is likely to go up since you’ll be older—but it does mean you wouldn't need to go through another health exam, even if you’ve had changes in your health situation. There may be a limit on how often you can make renewals without providing proof of insurability.

Some people choose to hold both a term and a whole life insurance policy. There are different reasons for this, but you might choose this path if you want relatively short-term coverage while you’re raising your kids (through a term policy) while also having the option of cash value in a whole life policy.

How Can I Get Term Life Insurance Online?

Traditionally, most people bought life insurance through an agent, which usually entailed in-person meetings and/or phone calls. These days, you can choose to buy through an agent or to buy online. 

It'd be awkward if we didn't mention: If you want to buy online, you can do so through Fabric by Gerber Life, which lets you apply for term life insurance online in about 10 minutes. If your application isn't approved for an on-the-spot offer, there is a chance you'll need to speak to an underwriter so they can learn more about your background. There's also a chance you'll need a health exam.

Term vs. Whole Life Insurance: Which Is Right for Me?

It’s not fair to quickly compare these two types of life insurance, because even though they both share the primary purpose of providing a death benefit, in the end, they’re very different policies. Each will be the “right” choice for people and families with different financial situations and goals.

If you’re comparing different types of policies, think about the financial needs of your family and which policies have features that can help meet those needs.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.